The Failure of Central Banking: Zombies

By Tuomas Malinen
Tuomas Malinen
Tuomas Malinen
Tuomas Malinen is CEO and chief economist at GnS Economics, a Helsinki-based macroeconomic consultancy, and an associate professor of economics. He studied economic growth and economic crises for 10 years. In his newsletter (, Malinen deals with forecasting and how to prepare for the recession and approaching crisis.
April 9, 2022Updated: April 13, 2022


A zombie is an aberration, something that shouldn’t exist in the real world. Yet in modern economies, such creatures do exist.

Zombies were introduced to economic jargon by Ricardo Caballero, Takeo Hoshi, and Anil Kashyap in their 2008 article, “Zombie Lending and Depressed Restructuring in Japan,” in which they identified the unprofitable and indebted, yet still operating firms in Japan as “zombie companies.” They found that, after the financial crash of the early 1990s, large Japanese banks kept money flowing to otherwise insolvent borrowers, or zombies. The reason for this was that these large banks themselves were in dire straits.

The financial crisis of the early 1990s had its roots in the deregulation of the financial sector in the early 1980s and the extensive efforts of the Bank of Japan to limit the appreciation of the yen with low-interest rates. These actions led to massive stock and real estate bubbles. At its peak, the value of Japanese equities was twice the market value of U.S. equities. It was also said that the market value of land under the Imperial Palace in Tokyo was greater than the market value of all real estate in California.

Many Japanese banks and corporations had invested heavily in the stock and real estate markets, and when the bubble imploded in 1990/1991, they suffered crippling losses, hurling them into insolvency. The government allowed and in some cases even encouraged banks to extend loans to ailing businesses and allowed banks to downplay their loan losses and overstate their capital.

While these measures saved the financial sector, the banking sector wasn’t restructured. This led to a considerable diminution in bank lending, and it became biased toward ailing, unprofitable companies, as weak banks tried to avoid further losses from company bankruptcies. The Japanese economy became “zombified.”

Effectively, since the Global Financial Crisis, central banks have ‘flooded’ the economy with cheap money. As explained in previous columns, this has been done through the ultra-low interest rate policies and programs of quantitative easing (QE). QE programs led to a fall in yields (rise in prices) in the whole bond universe, even though the central banks were buying just government bonds.

For example, the yields of U.S. corporate bonds started to fall immediately, even in the midst of a recession, after the Federal Reserve enacted its QE. When the QE kept going, the yield hunting guided investors to ever riskier products pushing, e.g., the yields of bonds of junk-rated companies to never-before-seen lows.

This ultra-low interest rate environment has seriously hindered the main driving force behind long-term economic growth, i.e., creative destruction.

Long-term economic growth is driven by technical innovations, such as the spinning jenny and modern industrial robots, which improve productivity, that is, the efficiency of production. In essence, they increase the productivity of a human worker, which, in turn, increases his wage and makes products cheaper.

In simple terms, creative destruction is a process, where more efficient (more productive) methods will replace the old and inefficient means of production. This occurs both within firms that replace unprofitable means of production with more efficient ones and in the overall economy, where old, unprofitable firms fail and new more profitable firms take their place. New, more profitable firms will foster productivity growth by enabling technological innovations to flow into production. This increases capital income, wages, and our living standards.

Another way to describe creative destruction is to note that both the successes and failures of businesses drive economic progress and development. The gains obtained from, e.g., profitable production of goods and services accumulate income and capital, while failures uncover sustainable businesses.

What happens when money (credit) is abundantly and easily available? Unprofitable firms that should fail start to roll over their debts and seek easy funding to carry on. This is what happened after central banks enacted their ‘extreme’ monetary measures in the 2010s. They started to create zombie companies, as ailing Japanese banks did in the 1990s.

Zombie companies are a menace to the economy, because they restrict the entry of new and more productive companies, diminish job creation in the economy, and lock capital to unproductive use. Zombie companies seek to survive, not to thrive. They hoard money and debt, but don’t invest. Workers may keep their jobs, but they’re locked in unprofitable production.

According to research by Natixis, a French bank, the share of zombie corporations in Europe had risen to 21 percent by the end of 2019. Now, due to the “corona bailouts,” the share is likely to be considerably higher.

According to data compiled by Deutsche Bank Securities, the number of publicly traded U.S. companies classified as zombies had risen to close to 19 percent by the end of 2020. According to Bloomberg, in November 2020, U.S. zombie corporations sat on an incomprehensibly large mountain of $2 trillion in debt. The number of publicly listed zombie companies had also swollen by 200 since the start of the COVID-19 pandemic. This is a clear example of how government- and central bank-induced bailouts make the economy more fragile.

Alas, central banks, especially the Fed and the European Central Bank, have fed the creation of zombie companies for years through ultra-low interest rates and QE programs.

Zombies shouldn’t exist in the real world, and the real world is about catching up with the “zombified” global corporate sector. With drastically hastening inflation forcing the hand of central bankers to raise rates aggressively in the coming months, we’re heading into a flood of corporate bankruptcies.

And then, calamity.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.