Can Central Banks Bail Out the Economy Next Time Around?

The Adam Smith Institute identifies 5 features of a zombie business:

1. The company is heavily indebted
2. The company is able to generate enough revenue to pay the interest on its loan but is not able to pay down the principle
3. The ability to meet loan interest payments is dependent upon continuing low interest payments
4. The above prevents the company from restructuring and so becoming more profitable
5. The above vitiates the need for the company to go into receivership, thus preventing the redeployment of capital and labour to more productive sectors

A vicious circle

Both governments and big banks are keeping zombie companies on life support and deepening their risk exposure. The balance sheets of problematic companies are not cleansed. As governments borrow more the contagion risk of sovereign debt, financial sector debt and real economy debt deepens. Meanwhile, small and medium enterprises are still suffering.

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The Global Economy: What Lies Beneath?

In a recession when zombies companies cannot afford to repay loans banks prefer to let them refinance if servicing the loan is problematic, and wait until things get better. If the economy doesn’t improve by the time the loan is due to be repaid, and as long as interest rates remain low both parties prefer to refinance again… and again… This “pretend and extend” mentality cannot continue forever.

It gets worse… much worse

Gerald Celente believes “Capitalism is dead. It has been replaced by Bankism”.

I believe the term Bankism will become a commonly used word to describe the fall of capitalism in the same way crony capitalism has, but it has a more direct assertion to what has replaced capitalism.

Back in 2014 Mr Celente said – “One of the trends for 2015 is ‘bankism,’ not capitalism. Capitalism is dead. This isn’t capitalism. Four words killed it, and they are ‘too big to fail.’ Quantitative easing hasn’t stopped. They keep doing it, they just change the game.”

It is only really now, over a year later that the mainstream is beginning to notice there is something not quite right with the banks and what we are being told about the economy and the so called recovery. They haven’t as yet put two and two together. They know something is wrong… something they can’t quite put their finger on. Everything they hear from the government doesn’t ring true somehow.

However, once they see the charade for what it is it will be too late. The coming financial crash will have swallowed them whole and only then will they connect the dots. We will hear everyday people in the supermarkets using the phrase bankism just as they did with “crony capitalism” and “too big to fail”. All these have something in common. They only became everyday expressions after the event… By then the economy as we know it will be finished.

Nobody can say for sure when this will occur or how things will pan out. One thing that is highly likely and will hit families hardest is unemployment. Unemployment could rise only slightly or it could skyrocket, it’s impossible to say. In any case, you need to take action now.

It’s better to be prepared 5 years early than 1 day too late

Having established that central banks cannot bail out the economy next time around means that people should invest in something real – themselves, a business or a hard asset.

Finally, remember what Doc Brown says at the end of the film Back to the Future Part III – “Your future hasn’t been written yet. No one’s has. Your future is whatever you make it. So make it a good one”.