These days, investors are nervous. They're nervous about when the next financial crisis will happen. The last time we had an actual recession was back in 2008 with the housing bubble burst and "too big to fail" banks collapsing. From 2010 until now, 2023, most of the world hasn't experienced a recession. The COVID plunge was temporary as central bankers collaborated with fiscal policymakers to create an economic boom that looked very impossible to create.
Businesses that were suppose to collapse during the COVID plunge ended up getting bailouts from the government, retail investors, and other sources. As much as we enjoyed the massive stock market boom that soon followed the COVID plunge, people are getting concerned over when the actual recession will happen.
As much as we'd like to use history to guide us on the future, we haven't seen an economic expansion last this long. That's why more investors and economists are becoming cautious with their predictions and where they choose to tie their capital. That could explain why the amount of money being poured into money-market fund assets continues to reach new highs.
Because we haven't had a recession in this long, issues like declining productivity, overcapacity, and spending imbalances are all things people are getting concerned with. It's only recent memory that $META $GOOGL $MSFT $AAPL
and other Big Tech firms went from being some of the most frivolous spenders and hirers to being cutthroat with layoffs, employee fringe benefits, hiring, and tracking their expenses. $AMZN
is looking into canceling warehouse leases and shutting down numerous private label brands because they've suddenly woken up to these issues. While Big Tech has woken up to these issues, many investors and management of other businesses rarely ask if their businesses have similar issues as well.
Without creative destruction in the US, how will investors both at home and abroad have faith that the US economy is capable of renewing and reinventing itself?
Without creative destruction, how can anyone think that the US economy is mature when American policymakers seem to go out of their way to protect as many firms as possible from volatility?
Without creative destruction, how can Americans have faith in their government when moral hazards are abundant?
Without creative destruction, how can we free the labor and capital that is currently tied to these zombie businesses?
Job losses are terrible. Seeing people lose their fortunes is terrible. As much as we don't want to see these things happen, we also don't want to see an economy filled and run by zombie companies. We don't want to see our nation's economy stagnate because zombie companies are dragging our nation away from its highest potential. We don't want to see our nation stagnate like the majority of the EU & the UK, Japan, Canada, and Australia.
If you're wondering how zombie economies act as a drag for the broader economy, consider these points:
- By borrowing at high levels, they limit credit availability to newer, more productive businesses
- They employ workers at lower productivity levels and make it difficult for more productive businesses to capture workers, leading to stagnation in wages and human development
- They cling onto physical assets like real estate and equipment that could be repurposed or liquidated for reuse elsewhere
- Their presence disincentivizes entrepreneurs/new firms that might otherwise compete against and displace inefficient incumbents through the immense power that they have in the nation's government
- Since many of them produce goods and services below cost, prices within the industry get depressed and resources get misallocated
- Since these firms rely on government subsidies and bailouts, they drain government resources that could otherwise be used for more economically beneficial uses
- Within their organizations, there's a removal of pressure for managers to innovate, retool, and restructure to survive, hurting competitiveness
There are only a finite amount of resources in the world, and ensuring that more of those resources goes towards the productive businesses and not towards the unproductive businesses will make the world a better place. When the next recession happens, refer back to this memo and have optimism when the politicians say that no one is getting bailed out.