Jay Powell is Victor Frankenstein

March 8, 2023

In the world of finance, something has been haunting economists and investors alike: zombie firms. The Fed has created hordes of zombie firms, with a study in April 2021 finding that over 25% of U.S. companies were zombies in 2020. These undead firms have been sucking the life out of the economy. 

But things are about to get rough for the zombie hordes. They face potential extinction from the same entity that created them in the first place, i.e. the Federal Reserve. We unpack how the Fed, as part of its brilliant central plan to stabilize the economy, spawned hordes of zombies only to kill them off. 

What is a Zombie Firm/Corporation? 

So, what exactly is a zombie firm? These are companies that are alive, but dead, literally. Dead because their profits aren’t enough to cover the interest expense on their debt (they’ve long forgotten about making any principal payments). Alive, at least artificially, only because of the Fed’s sustained policy of low-interest rates and easy credit. They have no real growth prospects, and the only way they can survive is by rolling their debt at ever-lower interest rates. 

What Could Kill A Zombie Company? 

The economic weapons that could kill a zombie company off include a sudden increase in interest rates and a sharp decline in market prospects. In a rising interest rate environment zombie firms can no longer roll their debts at artificially low rates, and must now roll at increasingly higher rates, if they can even roll at all. This leads to a death spiral where their expenses are greater than their revenues which ends in eventual bankruptcy. 

When a zombie firm goes under, it can cause a chain reaction of defaults and bankruptcies, unemployment for those formerly employed by the zombie firms, and a reduction in the supply of goods and services produced by zombies. We’ve written about what a chain of defaults might do to the price of gold and silver.  

How are Zombie Firms Still Standing? 

So why aren’t we seeing zombies dropping like flies right now? This is where the concepts of leading and lagging indicators come into play. A leading indicator is a signal that suggests a change in general economic activity is about to happen. A lagging indicator, on the other hand, is a signal that only shows up later, once the policy has made a direct hit, detonated, and its blast radius confirmed.  

In the case of the Fed’s hiking interest rates, each zombie firm has different debt terms and maturities, which roll at different times. We wouldn’t expect any zombie to be chomping at the proverbial piece of flesh to roll their debt at higher rates. They would not do this, unless there were no other choice. If and when they do, that’s when you would see the disastrous effects of this policy in full effect. 

Perverse Policies Produce Perverse Outcomes 

As we have seen time, and time again, the Fed’s policies sow the seeds of destruction, no matter which way they turn. In the case of Zombies, the Fed’s rate hikes kill and create simultaneously. As the old Zombies die off from the higher rates, new ones are created by the higher interest rate hurdle. Companies that had enough profit to cover the interest expense on their debt at the lower rates, may not have enough to cover it at higher rates. They were teetering on the margin, but are now suddenly plunged into zombie firm status. It’s a vicious cycle that produces price stability and maximum sustainable employment benefits no one and only weakens the economy. The death of these zombie firms will lead to defaults, layoffs, and potentially more inflation. The Fed’s policy turns viable firms into brain-munching zombies, who will then employ people for businesses that have no business being in business.  

The Silver (and Gold!) Bullet? 

While traditionally only effective against vampires, werewolves, and witches, is there a silver (or gold!) bullet for these Zombie policies? What impact does the zombification of the economy have on gold and silver prices?  

If zombies start dying off, this will surely have an effect on the labor market, which affects wages and consumer spending, which in turn affects broader economic measures. It’s almost as if, like, it’s all connected or something… 

Anyway, labor indicators have a surprising relationship to silver prices, which we discuss in greater depth in our Gold Outlook Report 2023, in addition to our predictions for the likely direction of gold and silver prices under different economic scenarios.  

Powell may be the creator and killer of zombies, but the real victims are the businesses and individuals caught in the crossfire. For more dynamics of the zombie economy, check out our Zombie month series on our YouTube channel. Stay safe out there! 


The melting point for silver is 961.93 °C - 1235.08 °K

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