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How Unprofitable Companies Stay in Business: The Rise of Zombie Firms

Generally, investors will lose all of their money, unless a small portion of their investment is redeemed through the sale of any company assets.

In an era of rising interest rates and economic uncertainty, the phenomenon of “zombie firms” has gained increasing attention. These are companies that, despite being unprofitable, manage to stay afloat, often through accumulating debt they can’t repay. This article delves into the mechanics of how these zombie firms operate, the role of banks and governments in keeping them alive, and the broader implications for the economy.

Key Takeaways

  • Zombie firms are unprofitable companies that survive by taking on unsustainable debt.
  • These firms distort markets by diverting resources away from more viable companies.
  • Banks and governments often bail out these companies, perpetuating their existence.
  • The Federal Reserve’s interest rate hikes are forcing many zombie firms into bankruptcy.
  • The persistence of zombie firms could lead to a “lost decade” of economic growth, similar to what Japan experienced in the 1990s.

The phenomenon of “Zombie Firms”

The Anatomy of a Zombie Firm

Zombie firms are not a new phenomenon, but their prevalence has been increasing. According to the Federal Reserve, at least 10% of publicly listed companies in the United States are zombies. These firms are usually older, overly indebted, and consistently display negative sales growth. They are often found in sectors like real estate and energy, which are less exposed to competition and more financially vulnerable.

The Role of Banks and Governments

One of the key reasons zombie firms continue to exist is the financial support they receive from banks and governments. When these institutions bail out unviable businesses, they essentially keep them on life support. This has led to a growing call for more targeted and well-calibrated support measures. As one economist put it, “If a company has to die because the world has changed permanently, let it die.”

The Impact of Interest Rates

The Federal Reserve’s recent interest rate hikes have started to weed out zombie firms. As interest rates rise, the cost of operating a business increases, making it more difficult for these firms to stay afloat. In 2023 alone, 516 corporations have filed for bankruptcy through September, a significant surge from previous levels.

The “Lost Decade” Scenario

The persistence of zombie firms has economists drawing parallels with Japan’s “lost decade” in the 1990s. During that period, a combination of undercapitalized banks and weak supervision led to a surge in zombie firms, resulting in a decade of slow economic growth. If the U.S. continues down this path, it could face a similar fate.

The Debate Over Government Intervention

While some argue that letting zombie firms fail is necessary for economic health, others caution against it. The government’s ability to intervene is also constrained, given the current levels of national debt. The debate is ongoing, but what’s clear is that the path we’re on is unsustainable in the long run.

The Human Element

At the end of the day, the persistence of zombie firms also boils down to human behavior. Banks and investors may be reluctant to recognize bad loans or failed investments, perpetuating the cycle. This aversion to acknowledging failure is a psychological factor that can’t be ignored.


The rise of zombie firms poses a significant challenge to economic stability. While they may seem like isolated cases, their impact is far-reaching, affecting market competition, resource allocation, and potentially leading to long-term economic stagnation. As interest rates continue to rise, the survival of these firms becomes increasingly untenable, forcing policymakers, investors, and regulators to make tough decisions that will shape the economic landscape for years to come.

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