Why the Fed is to blame for the boom in zombie companies

Why the Fed is to blame for the boom in zombie companies | Financial Times

When interest rates are at zero, creditors are encouraged to renew financing to unproductive companies

✒ Zero interest rates created an environment that makes “zombification” of companies, defined as businesses whose operating profits are persistently lower than their interest payments, possible. This is because when interest payments are low, creditors are encouraged to renew financing to unproductive companies to keep these zombies going as investors are desperately hunting for returns in an ultra-low-rate environment.

This directly distorts the crucial process of “creative destruction”, an innovation mechanism “by which new production units replace outdated ones” (defined by Joseph Schumpeter), causing inefficient allocation of resources in terms of both capital and people.