Ep – 42 Maximilian Göbel: Can Central Banks Slay the Zombie Hordes?

Ep - 42 Maximilian Göbel: Can Central Banks Slay the Zombie Hordes?

Zombie researcher Maximilian Göbel joins Keith and Ben on the Gold Exchange Podcast to talk about the scariest creatures the Fed has created, ZOMBIES! Will hordes of zombie corporations take over our economy? How serious of a threat are zombies? Are zombies increasing or decreasing? What IS a zombie corporation? Find out the answers to all of these questions and more for the first installment of Monetary Metals Zombie Month, all this October!

Connect with Maximilian: https://www.maximiliangoebel.com/

Connect with Keith Weiner and Monetary Metals on Twitter: @RealKeithWeiner @Monetary_Metals

Additional Resources

Per Bylund Podcast

Zombie Research

Zombie Talk with Max

The Fed’s Zugzwang Position

The Dollar Milkshake Episode

Theory of Interest and Prices

Podcast Chapters

00:0000:43 Spooky Intro

00:423:16 Maximilian Göbel

3:168:58 What are Zombie Firms?

8:5812:52 Zombie Firms

12:5216:56 Zombies and the Credit Gradient

16:5620:02 Bastiat, Per Bylund and Zombies

20:0222:12 The Death of Market Dynamism

22:1224:56 Falling Rates and the Benefits of Zombies

24:5632:05 Rising Rates vs Zombies

32:0539:30 Foreign Zombies and the Dollar Milkshake Theory

39:3050:57 The Fed and the State of the Zombie Research

50:5753:18 Free Market Zombies and Late Stage Central Bankism

53:1857:00 The Zombification of the Economy

57:0059:05 Max’s Research

59:0559:44 Outro Mwahaha

Transcript:

Ben Nadelstein:
Welcome back to the Gold Exchange Podcast. My name is Benjamin Nadelstein. I am joined as always, by founder and CEO of Monetary Metals, Keith Wiener. Today we are going to be joined by world famous, or soon to be world famous researcher, Maxamilian Göbel. Max, why don’t you tell everyone a little bit about yourself, your background, your history, and specifically why we’re having you on the podcast this month for our zombie month.

Max Göbel:
Yeah. Thanks, Ben. Hey, Keith, thanks for having me on. First of all, my name is Max. I’m a PhD student in economics. I’m officially enrolled in the University of Lisbon. I’ll be graduating by the end of the year. And my research has over the years focused on many different things. And one of these are zombies, actually. Why did we do that? Well, it’s probably a bit of a long story or just random. Me and my co author Nuno, we were just chatting and he basically works for sort of a hybrid think tank or institution between the Finance Department or the treasury, the Portuguese Treasury and the Portuguese Ministry of Economic Affairs. So he had some insights into what’s going on. The economy and zombie lending is a big thing in Portugal, actually. There are some studies out there as we will learn later on. And he brought it up and I thought, hey, that’s cool, that sounds nice. And yeah, we have this data on US firms and that was the beginning of 2021. And COVID hit and there were all these programs, government programs and also monetary policy by the Fed, all these interventions. And we thought, hey, what’s going on?

Probably some zombie landing is involved there, let’s have a look. And we did our research and apparently there was not much on zombie landing in the United States overall. And yeah, that kept us going. And we thought, hey, let’s have a look if somebody lending is at least a thing or not. And then let’s dig it deeper. That’s how we started off.

Ben Nadelstein:
Well, Max, let me start here. Let’s break it down for the layperson. What is a zombie company? Because when I think of zombies, I think of horror movies, these kind of undead, scary people. But in economics and in business, zombies are actually something different. So why don’t you break down first the broadest definition what is the zombie corporation? What is zombie lending? And then maybe even a narrower or more technical definition.

Max Göbel:
That distinction is absolutely necessary here. So, as you in the beginning, I didn’t know anything about zombies or zombie landing. But yes, zombie is basically a firm that is nonviable, that is unprofitable, and that only lives on or only does not exit the market because it’s kept alive by certain funding that it receives either by a bank or by the capital market. That’s basically a firm that is unprofitable but that is still operating even though under normal conditions or actually it should be out of business. Now, profitability is like, yeah, it’s a shaky definition, I would say. So someone might have a different definition than another guy. So the technical definition is really, let’s say, ambiguous at times. So there are many definitions out there. There’s no consensus in the literature about a technical definition or this is the technical definition that is nonexistent. Many define firm as a zombie if it received subsidized loans that’s in the form not by a specific government program per se, but rather by that alone has cheaper refinancing conditions. Refinancing conditions, then basically the refinancing conditions of those firms that are the most healthy in the sector. So basically the top rated that a firm receives alone with lower refinancing conditions than the top rated firms in the sector.

This is one definition. Other definitions basically say, well, it’s low profitability that it cannot pay its interest expenses for a certain number of years. And that is another definition. That’s a definition that we use, for example. But there are many caveats with that and also really depends on the data that you have at hand, the data that you observe. I think this is an empirical research. This is a crucial point here. Defining a zombie is not an easy task and you may run into many issues and you may run into many, let’s say, results that you had not expected before.

Keith Weiner:
Yeah, I think that’s pretty close to how the bank for International Settlements says it’s when profits are less than interest expense and for a certain period of time. And it’s not one of those firms that just has explosive upside, like a high tech, high growth firm that could break out of the whole thing by growing 100 times. It’s kind of mired down, it stuck and profits less than interest expense. And so how does this exactly keep.

Max Göbel:
Now that’s a good point because that’s actually the definition that we use also from the bank of International Settlement. So there’s one definition and the bank of International Settlements or economists there said. Well. If you use that definition. You’re actually disregarding those companies that might have a nice future outlook. Growth companies. Let’s say. That have a bright or that have good future outlook and you may not incorporate or you may incorporate those in your definition. Even though those are actually not zombies and that’s why they sort of tried to account for this possibility. And we in our research adopt the same definition there. That’s a very good point and this is already one indication of how difficult it is really to define or to classify a firm as a zombie.

Keith Weiner:
Things that can be said to that one. The BIS on every graph that I’ve seen, when they publish, the percentage of zombie corporations also publishes right overlaid on the same graph, the blue line shows what percentage of zombies are escaping zombie status or what percentage are stuck in the same status, and the vast majority of them stay zombies. They don’t get out. The other comment, just in listening to you talk about the other definition being that they get a lower rate of capital than healthy companies, the thing I read a lot about is that the interest rate structure has been falling for four decades. So one company may get a lower interest rate than another company at the same time, but they’re all getting lower interest rates than companies used to, and there’s a subsidy effect. Even if there isn’t one company subsidized relative to another, the entire interest rates structure has come down. And of course, now they’re trying to reverse that. But I think we can talk about that a little bit today and what that might mean for zombieland, but I don’t want to get too far ahead of ourselves.

Ben Nadelstein:
Well yeah, actually, Max, I had a question there. So let’s say I’m a zombie company. I’m ZombieCorp. And I’ve really met the real technical definition, the narrow definition, where there’s really no hope for growth, and then all of a sudden, I have a great windfall. Is it possible to ever recover from zombie status, or is it really? Well, once you’re a zombie, it’s pretty much back to the grave for you. Can zombies ever recover or is it terminal?

Max Göbel:
Yeah, good question. No, that’s actually the case. Again, it depends on the definition that you apply in the beginning. And in our research, we, for example, really try to account for those. So we don’t really want to include zombies in the first place that may eventually recover. So we don’t want to allow or in our research, we didn’t want to allow for that possibility because in the end, if the firm recovers, then lending to that firm might have been justified in the first place. And we were not interested in that. We were really, like, interested in this misguided lending, basically. However, the bank for International Settlements, they really have a lot of research on that. And depending on the definition that they use, there are actually zombies that do recover, and actually not a negligible chunk of zombies recovers. However, if they recover, they’re either underperforming relative to non-zombies. So they have lower investment, they have lower profitability, lower employment growth, or they transition again back into zombie status after a while. So they are really not like the rising stars afterwards, after coming out of the zombie status. So they’re hovering around at the threshold, let’s say.

Ben Nadelstein:
Yes, they’re kind of like these recovering zombie addicts. There’s light at the end of the tunnel, maybe, but your liver is permanently damaged and you might go back to the zombie status, so they’re permanently weakened. Let me ask you another question. In terms of the zombies and their impact on the rest of the healthy economy, do they have any impact or can we stay far enough away that they’re not going to feast on the healthy part of the economy?

Max Göbel:
So that’s basically the essence of our research that we tried to address. So are there still over the factors of stomach landing on the healthy firms or not? And what we find is actually two things on that. Actually. We find there are still over effects. So in sectors that have higher share of zombie landing, basically healthier firms or healthy firms are negatively impacted. So in terms of productivity, in terms of employment growth, and in terms of investment, however, the effects are not as widespread, I would say, like not as clear cut as they are in other parts of the world. For example, in Europe. Europe is a really special case with zombies. So we find spillover effects, but they’re not that really prevalent, let’s say. And we find these effects only to acquire among small and medium sized enterprises. We are looking at public list companies, so we’re having the data sample basically. And when you look at all firms, we don’t find any effects. But when you zoom in into the small and medium sized enterprises, then we find these. So these are basically the victims of the zombie lending. They have to suffer from zombie lending activities and yeah, I can talk to that.

There’s some interesting findings also from other studies by the bank of International Settlements that also directly speak to the small and medium sized companies.

Ben Nadelstein:
Keith, how does that drive with the kind of credit gradient idea that you’re talking about where these small and medium sized companies, they kind of have a harder time getting into this cycle and the kind of larger companies have this kind of pool of credits that’s been tilted their way.

Keith Weiner:
Yeah, I was just thinking about that and listening to Max. Obviously it should be obvious that every resource used by a zombie is therefore not being used by a healthy company. So there is some sort of economics calls like crowding out or out competing for resources or whatever. Zombie is a wealth destroying or wealth consuming enterprise. That may not be a good definition, but that is definitely what it’s doing. And so every resource that’s employed in this wealth destroying enterprise is not being used to create wealth somewhere else. Max I’ve written about this idea of a credit gradient that is like even in a free market and healthy economy, there’s a tilting of the playing field. That is the mom and pop companies and the early stage startups over here are pretty high and dry. We can think of this as a tool, Keith, a certain amount of water in it and the major corporations are on the other end that have much greater access to much larger amounts of capital, much lower interest rates. But when the interest rate is falling it’s not falling equally and you get a tilting effect where the biggest companies are just flooded, they’re just drowning and more and more and more excess credit there’s nothing that can really productively deal with it.

But the early stage companies, the mom and pops are even more sticking out of the water and just completely dehydrated. And so I think that meshes with what you just said. It’s the small to medium but also in that category I gold put high growth which is really the future of the economy. Take monetary metals for example. Depending on the metric you use you might say oh yeah, standard SME, right? We’re 21 employees, we’re this or that and we don’t quote our revenue publicly but we’d be pretty solidly within SME category. But I would really bristle if someone says oh, small business like yours we don’t consider ourselves to be the equivalent of restaurant chain of three or four restaurants in the East Valley of Phoenix or a small motel or whatever. There’s something very different about us which is we have very high growth potential as a global enterprise but we would be starved of capital the same way any high growth company would be starved. Keith capital the same way that more conventional SME would be starved. So how do you measure that? I don’t know if there is a way to measure that kind of spillover.

What I can say right now is that if you read what’s coming out of Silicon Valley the venture capitalists are all telling their portfolio companies that they should cut their spend and make sure they have 24 months of runway because you’re not getting any more capital assume you’re not getting any more capital for 24 months. So obviously there are companies that were just planning on going out to raise capital right now and they’re screwed. And there are other companies that are going to do a lot less impact on the world than they would have could have because they’re being starved. Is that the area that you want to starve in order to keep feeding some bloated dinosaur zombie company? Probably not if you sat down and asked that as a policy question but it’s sort of a consequence of I didn’t mean to monopolize it but then asked a question very near and dear to my heart.

Max Göbel:
Absolutely, I mean that’s the fair point. And we were asked like mostly or you find some lending to affect mostly small business enterprise as well. Does that really have that huge impact than on the aggregate? Well, in our research we cannot answer that but I would just conjecture also say that small medium sized enterprises are for example especially in Germany the backbone of the economy and even though in the United States it might be different. I cannot say too much about that because I don’t know that much about that, but I would suggest, or I would say that, well, it may not be overlooked. So there’s something going on and trying to figure out what that impact might be in the end. That’s actually something that we would like to see in future research and do ourselves. Absolutely. That’s the goal or the next step actually coming up, because I think this is really crucial. It’s not the big corporations, it’s not the Wall Street basically that runs the economy also much more the smaller medium sized companies that may not be overlooked. And I think research is also looking into the small medium sized enterprises much more in recent years. That’s absolutely true.

Keith Weiner:
We have a guest on just a couple of months ago, Ben, I don’t remember if you were the one who was on the podcast with me, or if it was Bens colleague Dickson. We had an economist named Per Bylund who gold have called the scene the unseen and the unrealized. So everybody, I hope, should be familiar with Bastiat, who wrote about the unseen, that you give a subsidy to this party, and that basically means you’re taking away from this party over here. And of course, the government redirects everybody’s attention or misdirects everybody’s attention. Sleight of hand with a flourish and a flash with a cape and maybe a little bit of flash powder. And everyone’s looking over here, look how great this is. We’ve given this person the subsidy. Meanwhile we’ve deprived this person of his livelihood, which is all true. And then Per takes it one step further and talks about the unrealized largely in the context of regulation and how regulation means that certain creative new business ideas never come to market in the first place because you can never raise enough capital to pay the lawyers to come up with a solution or whatever.

But I think the same thing would be true here. If early stage high growth potential companies are starved. What’s the impact on the economy? Well, it doesn’t change GDP today in any meaningful percentage of GDP, but that’s where your future GDP growth comes from. There is no way to measure that because it’s something that by definition doesn’t exist, did not come into existence. How do you measure the unrealized if you as an economist can measure that? You should get a Nobel Prize, in my opinion, because that’s a hard one.

Ben Nadelstein:
We’ll talk to the Nobel committee and get Max’s award. Okay, let me ask about this. We’re talking a lot about these kind of dynamics unseen, the unrealized. So I think one of the terms you used in your paper was this kind of market dynamism is dying. Why is that? What about these zombies? Kind of makes them sticky. I know Schumpeter might come back from his grave and start haunting us if we don’t talk about it.

Max Göbel:
That’s actually what Keith just mentioned. I mean, there’s this crowding out effect of zombies, basically or zombies take away some chunk of capital that could be used to much more. So the capital misallocation, that could be capital that could be used much more efficiently, much more productively if it was given to start ups to innovative firms. And by keeping these zombies on the market, it hampers basically the business dynamism, the cleansing effect of the economy, like entry and exit dynamics. This is also because zombies are parking productive labor. They keep wages basically elevated, slightly elevated relative to the case if they were exiting. There’s some short term benefits of having zombies there. Maybe I can talk to I don’t want to take too much to the front or maybe we’ll talk about that later. But absolutely there are these long run costs than to that. If there’s less entry of innovative, productive firms and we keep all these zombies floating around in the economy, yeah, it’s really dragging down on productivity. And that’s the consensus in literature. This is also why the literature tries to look into these effects and try to figure out what’s going on.

And yeah, that’s basically the story. So that this business dynamism, this cleansing effect, an engine of economic growth, actually is congested by keeping zombies afloat.

Ben Nadelstein:
Yeah, I know we talk about, and Keith talked about specifically a lot, there’s this kind of short term effect which might seem positive, but it’s actually masking this long term negative system. I know we talk about, for example, if our only objective was to kind of maybe lower consumer prices, you might want to lower the interest rate instead of raising it, which is like what we’re doing now. So, Keith, what do you think about that? There’s this kind of effect of the zombies apparently that in the short term it’s actually helpful. They’re employing people, they’re maybe keeping high wages. It actually looks good on the surface level. But in the long term, the more of these zombies you have, it’s actually a really negative thing for growth.

Keith Weiner:
Yeah. And having a downward pressure on consumer prices because these zombie companies are producing things. I mean, that loss. But their loss is essentially substitute the consumer to consume more. And so it has the appearance by all the conventional metric type statistics, GDP, wages, employment, it all looks good. How can you complain? What is their complaint about? And you take that firm out, right? Suddenly some jobs go away, some production of whatever consumer goods goes away. Prices go up, employment goes down, the wage ticks down rather than ticking up. Everyone’s going to say, if you’re a politician who says I’m going to slay the zombies, I’m not sure you do any voters for that, but if you did, they would all abandon you the moment you actually started implementing your program. They would say, he’s wrecking the economy, GDP is going down and wages are going down. And your opponents, would have a field day with you in the political stomp exactly.

Max Göbel:
So I think there are really this trade off between short run benefits, especially from an elected politician side point of view, and then the long run costs to that. And especially, as Keith was mentioning, there’s one study by a professor at the New York Lake Stern School of Business at New York University, who found that actually simplification in Europe imposed deflationary pressure. So the inflation, like inflation, was zero 4% lower in the aftermath of 2014, the aftermath of the European sovereign debt crisis because of some difficulty. So now probably people would like that, but yeah, this is one of the few macro impacts that the empirical research has come up with. So it’s interesting. Yeah, absolutely. What Keith has already alluded to about.

Ben Nadelstein:
This kind of macro view and the zombies. So we’re now maybe by the time everyone is seeing this, we might not be, but we’re now in an environment where there’s this attempt for rate hikes. We’re going to do it, we’re going to make it all the way to the top. I think everyone who’s watched the podcast kind of knows sarcasm dripping from my voice. We’ve kind of discussed why we think this dynamic is falling interest rates dynamic will have to continue. But Keith so now let’s talk about in the short term. Right now we’re in this raising of rate environment. What is this going to do to let alone zombie companies? But what about even the healthy parts of the economy, this kind of rising rate environment, what are we looking at? I mean, I know we’re not allowed to say the word recession here, so maybe we’re in a banana. We’re not exactly sure what’s going on in the economy. Speaking of things that are hard to define, but what is the effect of rising rates? And Max, what do you think might be the rising effects on zombies?

Keith Weiner:
Obviously, it’s the definition of zombie is a company whose profits are less than their interest expense and maybe less obvious. But most companies are borrowing pretty short term and they plan on rolling the liabilities, I’m sure, a bit longer after 2008 because they kind of got burned by that. There’s a lot of borrowing short defining long assets, not just in the banking sector, which means that as interest rates are going up, their interest expenses going up, zombie’s profits less than interest expense, what happens to all the companies who had profits greater than interest expense, but not by a very large amount, only by a small amount, and their interest expense goes up a lot? Well, suddenly the waterline has moved up and now they’re suddenly drowning underwater and we keep hiking interest rates and bringing more and more firms under the zombie threshold. That would be the first thought that comes to my mind. What do you think, Max?

Max Göbel:
Yeah, absolutely. These are the dynamics that I think will play out. I think that also the Fed tries to play out, like just to bring inflation down. They want to tighten financial conditions and that’s the way the playbook works. And unfortunately some firms will suffer from that. But I think as hard as it sounds, but that’s the cleansing mechanism that has been hampered for quite a while, especially after the Great Recession, I would say. And that now probably gets going again. And in the long term that just in the long term or mid to long term that may give us more productivity. And especially the discussion in the US. I guess is right now very hard about the productivity slowdown over the recent decades. And maybe now this cleansing mechanism, as hard as it might be for many people, will actually have some long term benefits.

Keith Weiner:
Yeah, if you could wipe out the zombies and then return to a higher rate of interest, that savers would, actually save. But the question is, can higher interest rates just selectively target the zombies and leave everything out like a neutron bomb? You just press this button and magically this one’s dead and this one’s dead. Can you do that if you’re the fab and you just have one knob?

Max Göbel:
Yeah, right. No, that’s hard to believe. Absolutely.

Keith Weiner:
Your friend has a mosquito buzzing around and lands on his head and the only thing you have is a 15 pound sledgehammer.

Max Göbel:
Sure, yeah, there will be some casualty that you try to avoid, but there will be some that fall back into that interest rate hike. Absolutely. But yeah, in the end, unfortunately, I think there’s just no other way to get the current problem of very high inflation rates under control. I think the US. Learned that the hard way, like in the 80s. Unfortunately, history sometimes repeats, may repeat itself.

Ben Nadelstein:
Yeah, I think the analogy might be that Jerome Powell is hunting zombies with a shotgun, but there are human beings near the zombies. And I don’t know if you know how shotguns work, but they’re not like sniper rifles. They kind of have the spraying effect. And so it seems like on the hunt for zombie head, we might actually be nicking a couple of people, some healthy people on the way. So it seems you mentioned this kind of playbook, they really have no choices. And Keith, you mentioned the Fed just kind of has this one knob and it’s not really accurate, it’s just kind of this one signal that they can send to markets. And with these one meetings and these one pronouncements, the entire economy can kind of shift from healthy to unhealthy. The waterline can go from still breathing, but almost under to way under and drowning. So do you think that, Max, do you think that there’s this kind of effect where with the higher prevalence of zombies, the harder it is actually conduct this playbook of monetary policy? Because policymakers are saying, listen, we know what we have to do, but it’s going to be all the harder because these zombies are employing people, they’re keeping wages high.

So with this prevalence of zombies, is there actually kind of a sticking effect on what would be otherwise their regular playbook on monetary policy?

Max Göbel:
I would say it’s difficult for the Fed to find the right gear, let’s say find the right direction there. But in the end, I think the Fed has to be clear on what it tries to achieve. In the end, does it want to lose its credibility? Which would be, I think, an incredible mistake to do that. I think credibility is key for any central bank. So it should stick to its mandate. And the mandate is, well, inflation, low unemployment and good economic growth, if I get the wording, is incorrect. But I think I got these like two, three pillars there, right?

Ben Nadelstein:
Just keep saying and they’ll add one more thing to their responsibilities.

Keith Weiner:
Its statutory mandate is two, it’s stable purchasing power of the money, which they define as a relentless chronic 2% inflation. So George Powell would be either proud or angry, depending on your perspective. And the other is full employment. They don’t have any kind of GDP or growth mandate, but they have a full employment mandate and the price stability mandate.

Ben Nadelstein:
Right. Maybe keeping that in mind, maybe zombies are a problem for them. But again, when we talk about this kind of short term and long term dynamics, actually maybe zombies aren’t that much of a problem for them, right? Like in the short term, the things that they’re concerned with, zombies don’t actually hurt. They might even help Max. But I want to ask you something because I was reading your papers and I found this very interesting and I want to get Keith take on it. So you looked at the kind of prevalence of zombies and zombie lending in different countries. Can you give me a breakdown? Because at first thought my bias, I came and I said, oh my gosh, the US. Is going to be like a zombie horde. They’re going to be everywhere. And the Europeans, they’re so smart. They’ll never allow some crazy zombie lending. They’re much smarter over there. I think anyone with an accent, I just kind of automatically assume that they’re a genius. But when I looked at your paper, you said actually that the US. Is in a stronger position to kind of fight off these zombies and is in a healthier spot than maybe some other countries like Europe and Japan.

That really surprised me. Can you break down why that is that’s very interesting?

Max Göbel:
Absolutely. Because actually it’s the other way around in the United States, as you said, it seems that zombie landing on prevalence is not as much of a deal as in Europe. And the key things that the literature here tries to justify it with is basically that it all has to do with basically that the United States is much more efficient in the United. States insolvency regime is much more efficient than that in Europe. For example, like when the firm files for bankruptcy in Europe, it is much less frequently restructured as it is the case in the United States. This is the key institutional difference that literature always refers to. Another thing is that probably in some way that the incentives for banks are different to lend to firms are a bit different, are probably much more misaligned in Europe than they are in the United States. So this relationship lending evergreening, even though there’s recently, especially from the Fed, some research coming out that evergreening is actually quite a big problem also in the United States, but most of the research has that basically linked to zombie landing in Europe. So the basic differences I would say are institutional differences, much more efficient insolvency regime in the United States and probably some misaligned incentives in terms of bank landing in Europe.

So that’s the case I was going.

Keith Weiner:
To add to that. How about the freedom to lay off unneeded labor? If you can’t lay off, then you could be a zombie. But if you could actually lay off those thousand people that are not really producing in that one division or one factory that’s so far, then you could avoid being a zombie by restructuring long before you get to bankruptcy, restructure the business.

Max Göbel:
Yeah, true, that could be the case. I unfortunately don’t know too much about that but that’s an interesting theory. I haven’t read that in the literature yet. And yeah, could absolutely be the case that this is much more easy or efficient in the United States as well than it is in Europe. I don’t know too much about the labor contracts and the unions there. I would say that probably Germany is much more unionized than the US. So that could be there a thing that plays into as well. Yeah, absolutely never thought about that.

Ben Nadelstein:
Keith, I kind of want to see and maybe you’ll tell me where I’m wrong here and I’m butchering the theory, but in this kind of dollar milk chick theory we’ve discussed on the podcast as well, there’s this kind of idea, well, the Fed is going to lose credibility, the dollar is all going to tank. It’s just going to get inflated away tomorrow. And one of the dynamics that we kind of discussed and say, hey, it’s a little more nuanced here, you might want to check this out, is you got to look at the other currencies as well. It’s not just in a bubble. You have to look at well, look at the dollar now you have to look at the dollar kind of compared to these other currencies and these other economies and their banks as well. So how does this kind of idea with the zombie lending and the other countries jive with that theory? Does it drive at all? Does it make sense or do you think they’re unrelated?

Keith Weiner:
Well, I think that if you’re a firm in, let’s say, Europe, your revenues is denominated in euros, but if you have gone to the capital markets and taken on debt that’s denominated in dollars, you have this mismatch. And if the dollar has gone up in Europe terms, which obviously it has over the last year or so, that could actually force you into zombie hood. Whereas even if everything else were fine, just the mismatch between your asset and your liability could drag you into it. And of course this is true the world over. It’s very often the liabilities denominated in dollars because it’s a richer, deeper, more liquid capital pool than in any other currency. So you get more traffic terms, you get more lenders competing for your business, whatever, and then if the currency part goes against you. So that’s an effect that could create zombies elsewhere in the world that wouldn’t be applicable to US firms because US firms, obviously the revenues are dominated in dollars, so they don’t have that mismatch. Just as I think about your question, there’s just so many little asymmetries and perverse asymmetries that as you drill into it, you see things like that.

Again, I don’t know if there’s any data on that. I’d be interested on what Max says about that, but that seems like that has to be a nonzero effect, if not necessarily a large effect, it would have to be non zero.

Max Göbel:
Yeah, good point, actually. So I never saw that in the literature saying like, well, that being dominated in US dollars is really a big thing for the firms and corporations there probably in emerging markets much more than it is in Europe. I cannot speak to that, but that would just be like my initial thought.

Keith Weiner:
If you have US dollars denominated debt if you’re in Europe. It’s something like tricky.

Max Göbel:
Exactly. Yeah, I think emerging markets, as you say, and also Turkey, for example, I think there are many unknown zombies down there. Yeah, for Europe it’s just as you said, we were really surprised that there are so many zombies in Europe. Yes, I think it’s just institutional business. It’s also institutional differences. Then you have to distinguish between bank based system and the capital markets based system based system, meaning that more corporations go to the capital markets, the United States probably then, and in Europe they are much more bank dependent, for example. So there might be some differences coming from there also. But yeah, there are many factors that play into and as you were just saying, like the currency, especially for emerging market economies, could also be a big factor there. Absolutely.

Ben Nadelstein:
Well, I want to ask you a question kind of based on your answer there. Listen, you never know, there might be some hidden zombies lurking in all these other countries. So let’s talk about the actual state of the research. So are there tons of people researching zombies? Is this like the new hot topic. Is it just you and Nuno kind of out there with the sword, investigating with a flashlight, kind of going through the cobwebs? And let’s also talk about the Federal Reserve. Are they worried about zombies? Are they kind of doing hand waving? Is this a new phenomenon for them? Are they like, oh, we’ve got this under control? Kind of give us an overview of the state of the research.

Max Göbel:
So this is actually something I’ve been wondering all along, but my impression really is that most studies, first of all, have only come out recently or have been published recently, like starting 2018, 19, now 21, 22. More and more studies coming out, mostly, however, on the European case. So Europe is much more researched than, let’s say, other parts. The seminal paper was actually in Japan, or coming from Japan. People were looking at the case of Japan. There the last decade that started it all off. But that was already in 2008. And then it took researchers like, ten years to pick up on that for the European case. But it made sense. So when that crisis started, so people were starting to get interested in all that. Now, in terms of the United States, as you already said, there’s not much research on that. That was also what kept us going. But yeah, the Federal Reserve thinks about it much more than it seems to appear. When you look at the literature, for example. So there’s one study out there that really looks at zombie landing. You’re basically like coming out at the same time. But we have to admit that those guys from the Fed were the first to really address that, even though it was probably only a couple of months.

Ben Nadelstein:
First is the worst. We have a thing here. First is the worst, second is the best. And that’s a research term that’s technical. So you guys are doing great.

Max Göbel:
Powell thanks. No, I don’t want to take the credit for that. It’s just interesting to keep that exchange. The Federal Reserve, I think there’s some very interesting insights that we can gain from that. But overall, the Federal Reserve really looks into it. But my impression is that also what I had a few conversations with some people at the Fed, and they were saying, we’re looking into it, but overall, the reception actually is that it’s not a big deal in the United States. So prevalence is not much as we found, as the other study by the Fed found, it’s not really a big deal overall, it’s not really widespread, not as big of concern as in Europe. However, then you see studies by the bank of International Settlements. They find actually that the share of zombies is much higher than we find. And what the Fed finds, for example, so they find, for example, in 2017, share 20% of publicly listed firms. Keith zombies. Again, this all plays into the definition. How do you define zombies? Can make all the difference. So overall, I think it’s really tricky. The consensus what is my impression? The consensus is that it’s not as much of a deal in the United States, which makes sense given the institutional differences.

So yeah, even though I think being dismissive about it is potentially something that you should not do. So yeah, that’s the thing.

Ben Nadelstein:
And Keith, does that mean that it’s going to be more difficult because of these kind of differences by country to raise rates in other countries? So like looking at the US. And Europe, let’s say, well, obviously Jerome Powell is staring down, let’s say his 6% of the zombies, but if you go to Europe, they might be staring down, let’s say 15% zombies, and for them to start raising rates, there’s going to be a lot more bloodshed than in somewhere like the United States. Does that make sense, Keith?

Keith Weiner:
Yeah, I guess as a relative amount of political pressure, ECB would be undergraduate pressure for sure. One thing I’ve said about central banks many times, it is the pollutant of what should be a market function. And of course you’re going to have people landing up on both sides. You’re going to have the anti inflation camp crying for higher interest rates. I actually argue, Max, quite extensively, that if you wanted lower consumer prices, you should want lower interest rates. Because if the subsidy prefers to produce more subsidy, it’s feeding the savers to the consumers through the producers and through zombie producers. So that’s the perversity. But the conventional theory is higher rates for checking inflation. So you’re going to have the anti inflation camp lobbying for higher interest rates. Then you’re going to have the unions and the zombie firms. But it isn’t just the zombie firms. This reaches upstream. Those zombie firms have vendors that they buy stuff from and all of their vendors have to be looking at it and saying, okay, those zombie firms represent some percentage of my business. If that percentage of my business went away, I’d be a zombie. And then all the employees of the zombies, they buy things like cars and computers and toilet paper and everything else too.

And if those people are laid off now, we have fast welfare states so people don’t curtail their consumption as much as they would have 100 years ago. That clearly somebody who’s making a six figure salary consumes more than somebody who’s subsistent on welfare. And that means the car companies, just to take one apple, to mention another, suddenly their revenues are being hit and all those consumers are making payments on their credit cards and their cars and all kinds of other things. Suddenly their ability to make those payments is impaired. And then the wave of, I guess, dragging companies into insolvency to spread my personal take, I’m less optimistic than you, Max. My personal take is that you can’t at this point liquidate the zombies. First of all, the shotgun is spraying far too broadly, you’re going to hit a lot of others. But also just as it becomes like a series of dominoes, one falling into another, falling into another, and it’s going to ripple through. And nobody’s prepared for not only just zombie to zombie to zombie, but also balance sheet impacts. So at what point does the banks then become, by any definition, technical, otherwise become insolvent and the banks have to be wound up and of course, their creditors are other banks?

And where does it end? There’s going to be a mass insolvency. If they really are serious about rising interest rates, look what happened when they tried to hike rates in 2005, and that caused ’08. Now we have much greater amounts of leverage, much thinner margins, just all around. And now they think they’re going to be more serious about hiking rates now than they were in 2005. I don’t think it’s possible to do that and still preserve the system. I think something breaks in a very fundamental way. So as soon as that heat starts to reach the Fed and the ECB in a way that they feel it, then they’re going to reverse course, and it’s only really a matter of when. That’s my view on it.

Max Göbel:
Yeah. No, that’s very interesting and absolutely this is the thing that when I get the question about the research that we did, well, it affects only small means enterprise as well as that really of a big impact. Well, with the supply chain troubles that we’ve experienced all along over the last two years, let’s say, you don’t know you don’t know how that will spill over what the knock on effects will be, as you were just describing. So, yeah, it’s a tricky question. It’s a tricky thing, and I think being dismissive about it would be the thing I would not recommend.

Keith Weiner:
It’s a pretty interesting data point for what percentage of something is something else? And so I’ve seen the statistic going around that you may have seen it as well, that the German economy takes $20 billion in natural gas and turns that into $2 trillion worth of productive output. So what percentage of natural gas to the whole thing? Well, you could say that 1%, but is that really 1%? What if you turn off that natural gas? Well we’re conducting that experiment live right now in the German laboratory. You turn that off, you find out it’s not actually 1%. In a way, it’s 100%. Call that statistical anomaly, call that statistical methods problems. But I think these things are much more significant than proportion. The same thing we see in California huge food producing region, in California Central Valley. And I’ve seen so many people, the environmentalists are against irrigation, pumping water for farming, and they say it’s a similar thing. It’s only 1% or 2% of California’s economy. How important is it? Well, if you turn off all that food production, you’re going to find out just how important it was after you’ve destroyed it. I think the same thing.

And of course, people say, well, Keith, are you saying that we should keep creating zombies? No, I’m not saying that. So you may appreciate this as a presumably native speaker of German. I gave a talk in Vienna a couple of months ago, and the title is The Zugzwang Position about the Fed and the ECB. They’re in this position and either move they want to make, they lose. There is no winning move.

Max Göbel:
Absolutely.

Keith Weiner:
If they were cutting interest rates, we could talk about the pathologies and the damage and the harm they’re inspecting and everything else. If they’re hiking rates, we can talk about a different set of pathologies and a different set of harms. Either way.

Max Gobel:
Yeah, I don’t want to be in the seat of Jerome Powell right now. Absolutely.

Ben Nadelstein:
I think this is a great way to kind of keep these great researchers always employed, because if we lower the interest rates, there’s more zombies we got to discuss. Oh my God, look, the growing horde of zombies. But if we start rising rates, then, oh my gosh, we’re going to destroy these zombies. It’s going to have an effect on the economy. So it sounds like your job prospects in the future are pretty well secured. Keith, I have a quick question for you. So we talked about the Fed as a kind of politicization of credit. Do you think there’s a hypothetical scenario where in a free market with kind of this open credit that you could have zombie companies? Or is it just only this kind of weird symptom of the central late stage central banking that we’re in?

Keith Weiner:
The only thing I can say is imagine that there’s no such thing as a bailout. There’s no such thing as a government sponsored enterprise that would guarantee a loan. There’s no such thing as a central bank lender of last resort. If you lend your money, you lend your gold. I want to put it in that context. You lend your gold to somebody, the only way you’re going to get it back is that somebody repays it. Would you lend your gold to a company who’s proven that it’s profits are less than its interest expense? I don’t think that would be happening. People tend to be conservative when it comes to Milton Friedman talks about this, and I’m no fan of Milton Friedman, but he’s talking about in the context of spending. That the same thing could be true in lending. You get a completely different kind of I think you use the word efficiency when somebody is making a decision to spend or in this case, lend his own money versus a disinterested bureaucrat making a decision to spend somebody else’s money on someone else, or in this case, lend party A’s, money to party B.

If it’s a bureaucrat making that decision, then how much does he really care about the long term damaging effects of that relative to the short term political boost to his career. And Max referred to that earlier conversation as well. So I don’t think this would exist in a free market. I think this is entirely on them. Of course, capitalism would be blamed in the end. Capitalisms fault. Greed cost 2008. Greed is going to cost whatever 2022 or 2023, whenever the big blow up is, oh, that was greed, that was banksters, that was this, that was that.

Ben Nadelstein:
If you forgot, inflation is right now being caused, of course, by the greedy corporation.

Keith Weiner:
Corporate greed. That’s right.

Ben Nadelstein:
Okay, Max, Keith, we’re kind of heading towards the end here. I want to ask both of you a question. So let’s put the numbers at 6% of Zombification in the US. Do you think, let’s start with Max, that that number is going to increase in the next five years or it is going to decrease in the next five years.

Max Göbel:
So I presume that the Federal Reserve will stick to its goal until the job is done. As Jerome Powell has said, we’ll keep raising rates and I think that will drive many firms out of business. It will also discipline banks even more to be cautious to whom to lend. So this relationship lending, I think, and Evergreening will also decline. So I think there will be less zombies flying around, even though more firms might get below the threshold might get below the threshold of the definition now in that sense. But I think overall, let’s say if a recession occurs or if the banana occurs and we go out of it, I think there will be less zombies flying around afterwards and in the end, it will be much more beneficial for overall growth and productivity. That’s just my take. Some people may say, yes, that guy is crazy, you got it all wrong. But, yeah, I would be happy for a discussion about that. And probably Keith now destroys me, like right away.

Ben Nadelstein:
All right, Keith, you’re up. Get to zombie slaying!

Keith Weiner:
Not destroyed, but I’m less optimistic. For starters, I think higher rates drag a disproportionate number of companies under. Margins are pretty thin. It doesn’t take that big of a rise in rates to drag a lot more companies in. And then secondly, I think, and this is not economics, this is political now. And I was saying the economic writings that I don’t really know what the politicians are going to do next. I don’t think anybody else does either, but I certainly don’t. But this is a political calculus. Is Jerome Powell going to continue to stay the course or is he going to flinch? And as you were saying that Max about he said he’s going to stay the course and do whatever it takes, so the job is done. That really reminds me of Swiss National Bank Governor Thomas Jordan as late as he gave a speech in December 2014. And I believe another one in early January 2015, in which he promised this was his commitment to the Peg of the Franc of the Euro, to do whatever it takes to have unlimited resources. They have a printing press, they can do it.

Two weeks later, the peg snaps so violently, he loses 20% of Swiss annual GDP in a millisecond. Again, this is a political prediction, and I’m not a political pundit. I don’t really know anything about how politicians are going to make their next move, but my gut is that Powell is going to find the pressures overwhelming or he gets replaced. It’s one of those things that if you do what we need or we’ll just find somebody else who will. And is that a violation of the law? Yes, probably, but I don’t think they’re going to let the little thing like a law stand in the way of political objective right now, politically, get them to do what they’re doing. But when that changes, all bets are off.

Ben Nadelstein:
So it seems we’ve got the optimists maybe in one corner and the smiling cynic and the other. So, Max, before we end here, where can people find more of your research? Obviously, you’re getting the Nobel Prize, so everyone’s going to know about you soon, but where can people find your research? And what do you think of researching next before we head out here?

Max Göbel:
Yeah, thanks. Well, people can find more about my research on my webpage, so Maximiliangurble like oe.com. And there are various kinds of stuff up there, so I’m interested in many different things recently, mostly machine learning, actually. I think it’s a very exciting topic. I’m not really proficient, but I’m just fascinated by the stuff that’s possible. But working with that machinery, let’s say, with these statistical tools, very fascinating. And in terms of what I’m going to do next or what I intend to do next. Well. Try to incorporate machine learning here a bit into the research. Probably. But especially like what also. Some economists at the Fed has suggested to us to look into potential spillovers and knock on effects that are occurring. How the input output dynamics basically play a role here in simplification suppliers supply and demand. Which are the suppliers of zombies. Which are then those that need zombies as suppliers and all that downstream. Upstream dynamics here. I think this is really crucial to, in the end, get a sense what some if it’s really hurting the economy, what the effect is. That will be next on the agenda. But, yeah, maybe something else is coming up next week and I’ll change my mind completely and go into another direction, but I think this is probably the natural following up.

Ben Nadelstein:
All right, well, Max, thanks so much for coming on. Obviously, with the rise of the zombies, we’re going to have to have you back to see if the optimists or the pessimist won. And thanks again for coming on.

Max Göbel:
Thanks for having me guys. Really nice was a pleasure.

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