Zombies are taking over Britain

There’s one book that every central banker should read. It’s not by Friedrich Hayek or John Maynard Keynes.

It’s Mary Shelley’s Frankenstein.

In it, Dr Frankenstein has the hubris to believe he can use science to short-circuit nature, and re-animate something that should be dead. The creature he creates goes on to destroy him.

The parallels are striking. Our own central bankers thought that their audacious experiments in monetary policy could revive dying economic models.

Now Britain is being eaten alive by the monsters they have created.

Unfortunately, we suspect that – rather like Frankenstein – this story won’t have a happy ending…

Why zombies are taking over Britain

It’s easy to understand why the Bank of England acted as it did after the financial crisis.

The autumn of 2008 was crazy. I’d spend my day in the office, running between my desk and the Bloomberg terminal, waiting to see which bank would collapse next. I’d read so many politicians and City boys shrieking about meltdowns that I’d get off the train home at night and emerge blinking into the street, marvelling that all the buildings were still standing.

You can see why the Bank might have thought that cutting interest rates to zero seemed like a good idea.

The trouble is, every action has consequences. Britain is now crawling with zombies, reports this morning’s Financial Times.

Low rates and quantitative easing (QE) have delayed or prevented the process of creative destruction from taking place. As a result, firms that should have gone out of business are grimly clinging on to a twilight existence, neither bust nor solvent.

One in ten companies are only paying the interest on their debt, according to the insolvency industry’s trade body, R3. They are unable to repay any of the actual loan. So the firm sits there consuming resources inefficiently, dragging on the economy. And the zombies are spreading. Their numbers have grown by 10% over the last four months.

Now R3 is hardly a disinterested observer. It’d be very good for business if someone were to come along and decapitate all these undead companies.

Yet, it’s not just R3 who believes the zombie plague is bad for business.

The Bank of England warned last week that these ‘zombie’ companies were part of the reason why the economy is so weak.

The trouble is, a zombie company doesn’t just take up physical space. It takes up valuable bank lending capacity too. Zombies are only just able to pay the interest on their debts. If the banking system were healthier, they’d be put out of their misery.

But as it stands, notes the FT, “banks are reluctant to write off those loans… because, among other things, the banks might need to raise additional capital. And because those loans to zombies remain outstanding, banks do not have enough capital to extend to new, viable companies”.

So they indulge in what’s called ‘forbearance’. That is, they allow borrowers more slack than they normally would. And that creates the zombies.

Mervyn King’s sick sense of humour

I’ve always suspected Mervyn King of having a droll sense of humour, but this really is jet-black comedy.

It’s not that I disagree with him – far from it, at MoneyWeek we’ve been talking about the zombie problem for years.

But for our central bank to complain about zombie companies cluttering up the economy is a bit like a James Bond baddie moaning about all the sharks in his swimming pool. Who put them there in the first place?!

Worse still, it’s not as though this plague of zombies is going to change the Bank’s policy. King is still trying to dismiss inflation fears and continues to talk up the prospects for more QE.

You can see why. If interest rates were to rise now, it would inflict an awful lot of pain on the economy. King isn’t the only one worrying that perhaps banks have been a little too forgiving.

The other day, trade magazine Money Marketing reported that one of the Financial Services Authority’s risk specialists had warned that “lenders may have left ‘hundreds of thousands’ of [mortgage] borrowers in a worse position by providing forbearance when they have experienced money problems.”

The point is that if you move someone onto an interest-only loan, you may leave them in a position in the future where they have no hope of ever paying back the original capital. Better to repossess now rather than leave people hanging on as ‘zombie’ households.

Of course, this is exactly what will happen once bank balance sheets have improved enough. Everyone who found their lender nice and accommodating when it was in trouble, will get a nasty shock when its balance sheet has been healed by sufficient injections of QE. It’s only a matter of time.

Unfortunately, this has left us all in rather an unfortunate position. We’re reliant on low interest rates to get by. But the low rate cure is also killing us. One way or another, it’s going to end badly.

We have more on why the UK economy is in far worse trouble than anyone believes in the latest issue of MoneyWeek magazine (if you’re not already a subscriber, get your first three copies free here), and some ideas on how you can protect your portfolio against it. We’ve also been working on a report on the topic which we’ll be releasing in the next couple of weeks – keep an eye out for it.

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33 Responses

  1. 19/11/2012, Bob wrote

    First zombie houses, now zombie businesses… any chance of Lollipop Chainsaw coming to our rescue?

  2. 19/11/2012, JohnB wrote

    You are not wrong. Indeed!
    I sometimes wonder at the motives for their madness.
    Are they incompetent idiots (no, too clever for that)?
    Are they blinded by ideology?
    Are they crooks, and if so, how do they gain?
    When is the great defrauded British public going to object?
    I liked your James Bond villain analogy.

  3. 19/11/2012, HL wrote

    Spot on, John B. Holding up modern versions of horse-drawn plough makers, and postponing their inevitable demise, is so clearly wrong that we really must question the motives of our highly-paid central planners.

    This cannot end well.

  4. 19/11/2012, Jimmy O'Goblin wrote

    I have been reading and hearing, with increasing frequency of late, about just how dangerous a place for one’s money the government bond market is becoming.
    It started some time ago, I believe, with Goldman Sucks (sorry, typo – Sachs). Then Bill Gross from Pimco, then numerous newspapers (including today’s FT).
    I’m starting to get the feeling I had – in 2000 was it? – just before the stock market crashed.
    I wonder if zombies can hear and read?
    Regards
    JOG (not a Bond Man)

  5. 19/11/2012, HL wrote

    Spot on, JohnB. This policy of holding up the modern equivalent of horse-drawn plough makers in an attempt to postpone their demise, is so clearly wrong and damaging that we really must question the motives of our central planners.

  6. 19/11/2012, SteveH wrote

    Maybe inflation will rescue the skint companies, just as it’s the only way to rescue skint governments

  7. 19/11/2012, Tim W wrote

    Ha ha ha, loved the bond analogy!

  8. 19/11/2012, Peter Kellow wrote

    Interesting different take on this from John’s colleague at Moneyweek

    http://www.moneyweek.com/news-and-charts/economics/uk/right-side-how-long-can-this-farce-continue-61414

  9. 19/11/2012, K2 wrote

    Inflation will rscue no one – govt, company or individual. Costs increase, but cash availability does not when credit deflation has to run it,s course. All that happens is everyone gets poorer more quickly

  10. 19/11/2012, David N wrote

    It’s all very well for guys in the financial sector to moan about ‘zombie companies’ and the health benefits of raising interest rates. I suspect that it is rather easier to make money in the City when interest rates are higher or at least moving – but does that really help anyone other than casino bankers?

    In reality, if interest rates go up, the zombie companies (as you choose to call them) go bust, making thousands of people unemployed, tens of thousands more will lose their homes and their savings, the banks’ bad debts will skyrocket, demand for welfare payments will skyrocket and so on. It is not desirable. It is a nightmare scenario.

    Better to foreclose now? You wouldn’t say that if you were trying to house feed and clothe a young family. Anybody who would benefit from walking away from their debts can do so if they wish. The rest are trying to ride it out, and the BofE would be better to help them than throw them to the sharks.

  11. 19/11/2012, cookie wrote

    I have never been able to understand how King and his cronies where even able to keep there jobs after failing to monitor the previuos boom are they fit and proper to manage necessary remedial action. Time has shown that this near zero rates is a curse only to signal to people with savings things must be bad and bolt down the hatches. Who would invest in this climate when the trust has gone in the ones who should know how to manage the economySack the lot

  12. 19/11/2012, Stuart wrote

    Thanks for your comments on zombies, You suggest that banks should call in interest only loans to repay capital on loan. Whilst I agree with the sentiment it could cause loads of trouble since if people were asked to repay the capital immediately it might well result in putting their homes on the market to raise the necessary funds. Since this could put many houses on the market for buyers wanting to buy, however no loans would be available from the banks to help resulting in deadlock. It is far better to wait until the lending rules are revised.

  13. 19/11/2012, Orb wrote

    David N @10, your scenario may be hypothetical. But if we considered parts of it possible – such as banks go bust (100′s), many thousands (millions perhaps?) become unemployed, homes are lost (did you mean repossessed?), demand for welfare benefits ‘skyrocket’ – then, as has been mentioned somewhere on these pages before, it sounds like you are painting the scenario of what DID happen in the USA…. and it seems to have worked!

    I’ve also mentioned before: Iceland seems to have done ok telling the banksters where to get off!

    A short sharp shock, but at least we’d be growing again, and not for being dependent on a group of fraudsters! (Consider reading The Devil’s Derivatives – Nicholas Dunbar)

  14. 19/11/2012, NeutronWarp9 wrote

    Is a company a zombie because it is fundamentally flawed or due to a dire lack of demand? I do not see a scarcity of business space (far from it) nor a throng of eager bankers wanting to throw money at companies. For those two reasons I do not agree with JS.
    The myth that dead men walking should do one and leave room for the bright, new entrepreneurial youth to surge forward is quite laughable. Most start-ups have a ridiculously high-opinion of their concept and yet can only deliver a re-branded existing model often sourced from cheaper overseas labour.
    Stimulate demand and we will all benefit, rather than condemning many to be on them.

  15. 19/11/2012, Malcolm wrote

    nt, reduced pay, reduced levels of business and years of worry and sleepless nights.
    And then there is the generation that follows, facing increased education fees, impossible housing prices and mortgage requirements, poor employment prospects….
    The human misery of losing your job, home, business, self worth and all the pain and disillusionment that comes from this cannot be described as “Zombie”.
    Those of us with secure jobs, fulfilled, should feel humbled by the sheer endeavour that enables our “Zombie” fellow citizens to stay positive, counting our blessings that it is not us, and our “leaders” should engage better thinking than blaming someone else.

  16. 19/11/2012, CHRIS wrote

    Thanks to King and his central banking chums all over the West trying to cover up the damage caused by Globalisation policies with low interest rates and a manipulated housing boom we ended up with the crisis of 2008. Trying to maintain this fake economy at the inflated GDP levels of 2007 by using QE and borrowing more money is a disaster for the young, the prudent and the country. If the corrupt BoE and MPC ever do try to go back to sensible monetary policy the effect on the economy will be a disaster and will reveal to the population just what the BoE and our corrupt politicians have done to the UK by being champions of Globalisation. If they don’t it will also be a disaster.

  17. 19/11/2012, David N. wrote

    Orb 13 – It is one thing for Iceland to bin its financial and ‘retail’ sectors, and go back to basics. It is a small country and a close community, with a number of staple industries. To do the same in Britain would be to trash what industry we had left for the benefit of precisely that financial sector which got us into the mess, and which is screaming for higher interest rates to allow them to make their margins.

    Furthermore if King and his colleagues were misguided enough to take this advice the resulting social chaos would have the army on the streets.

  18. 19/11/2012, jack wrote

    My obituary
    Since only recently joining into your debates, Orb is the only one out the whole lot of you that tries to give a solution to the problems we face as a country.
    The rest of you just bitch and moan and look at fanancial models that not even the BOE can rely on!

    I look forward to your compliants

  19. 19/11/2012, aff wrote

    It is in fact impossible to imagine these bankers don’t know what they are doing and therefore their motives should definately be questioned.

    Bankers have long understood they can create booms by increasing the money supply and busts when they decrease it. This has gone on for centuries.

    To look at the world today we see every country is controlled by central banks. It is not a stretch to imagine they are colluding in a premedited fashion to create this crisis and enslave us further in their debt. Look no further than Europe for the evidence.

    I like the frakenstien analogy, I can only hope it is correct and this time they have gone too far. Lets not waste this current crisis. This is the time to end central banking

  20. 19/11/2012, jack wrote

    I feel the blood returning to my viens

    Aff, tell me more of your solution???

  21. 19/11/2012, Ron Ball wrote

    I have felt for a long time that interest rates should be increased. Of course, it would need to be a progressive increase but at every step it would have several advantages.
    1. It would bring down the price of houses [and rents].
    2. It would increase the value of the currency – thus reducing the cost of imports and reducing the balance of payments deficit and reducing inflation.
    3. It would slowly hand back to the BOE some control of interest rates up/down. Better than printing money.
    4. Savers would get better interest rates and this would increase retail spending.
    5. We would be taking steps along a road back to the real world.

    Why don’t we do it? Probably because the present arrangements suits the banks.

  22. 20/11/2012, Francisco23 wrote

    Firstly, it is not just the Bank of England’s monetary policy that should be questioned, rather it’s the very concept of a Central Bank.

    Secondly,what about the role of career politicians (traitorous good for nothings who should be dangling from lampposts – figuratively speaking of course) and the malicious concept of a growing nation state with it’s unproductive parasitical micro managers endemic throughout government funded fake charities?

  23. 20/11/2012, Francisco23 wrote

    Thirdly, it’s the growing welfare state that encourages people to believe they have a right to exist as a parasite off the taxed earnings of the productive classes. Robin Hood would be proud of the continuing malicious redistributive theft.

    Fourth, the career politicians in the EU and the unelected who crawl through its corridors of power on the ultimate parasitical gravy train sucking the lifeblood out of the sheeple.

  24. 20/11/2012, Francisco23 wrote

    So John Stepek raises a valid question, but stops too soon.

    There are complex issues at play and micro-managing a little bit here (monetary policy) is not going to bring the necessary fundamental medium to long term structural changes to the Western economies.

    Required reading would be Carswell’s book and that of Yaron Brook and then for their great words to be spread on the potential for *new* solutions, not just tweaks within the existing broken paradigm, that are absolutely necessary.

    A radical shift in perceptions is required, but as turkeys do not vote for Christmas do not expect bright ideas from the parasitical classes.

    Anyone care to start a new political party?! ;-)

  25. 20/11/2012, not a zombie wrote

    I disagree that it is bad for the banks as the article suggests – “better to repossess now”.

    Even paying interest only, the bank is still making a profit and the cashflow generated from it is substantial which can be constantly added to their balance sheet. Also, in collecting monthly payments, very little resources are used so it costs little. The article suggests repossess and take a loss. This costs money and you have to write off the bad portion. You then have to incur substantial costs to write new loans and take on new risks.

    Maybe these zombies are not as brainless as stepek makes out.

  26. 20/11/2012, Andrew Nicholas wrote

    Whilst there is an element of truth in what you say, the fault lies once again, directly with the banks. It is irrelevant if businesses are only able to pay interest on loans, if they have plenty of assets to more than cover their total borrowings. The problem is that Banks are not interested in actually making loans for businesses to expand, or even trade properly.

    Banks are starving companies of the cash they need to trade, thereby compounding the problem – companies’ are restricted in their trading by lack of borrowings, which means they can’t make profits , so they can’t pay back existing loans.

    The Banks senior executives destroyed shareholder value, crashed the world economies and paralysed commerce. They receive billions in (virtually) free money from the taxpayer, but use it to enrich themselves in investment banking instead of lending it out to the taxpayers who provide it.

  27. 20/11/2012, Aff wrote

    Jack, My own very humble opinon is that central banks are a huge plague on mankind. If I was able to offer any solution the first thing I would do would be get rid of all the central banks. Their ONLY purpose is to fund the wealthy and create inflation to rob from the people. Thats it! From that point on the wealthy gain the power to create armies, and weapons, control the media, brainwash the public, rig elections, you name it.

  28. 20/11/2012, jack wrote

    Aff, I like your point and does remind me of the running of the religious church from our history past.

    The central banks have seen to take on a role of thinking that they are our saviours, in many ways the same as religon they are proberbly going to course more pain than salvation.

    It does make me think that Edd Miliband has the right idea in splitting the banks into much more controlerable units.

    sometimes it’s better the devil your know

  29. 21/11/2012, Will wrote

    Aff/Jack, there’s a superb book written that addresses many of the topics/issues you’ve touched on called “The Coming Battle by a guy called M. W. Walberg… Well worth a read (there’s also PDFs of it knocking around the net too…

  30. 21/11/2012, Aff wrote

    Will, I’ll have a look at that. Cheers

  31. 21/11/2012, jack wrote

    Will, it looks intresting and I will read all 460 pages, a book that was writtern over a hundred years ago yet still speeks volumes is worth reading.

    I would like your know your thoughts on this and how you came across such a publication?

  32. 21/11/2012, jack wrote

    “The path of the righteous man is beset on all sides by the inequities of the selfish and the
    tyranny of evil men. Blessed is he who, in the name of charity and good will, shepherds the weak through
    the valley of darkness, for he is truly his brother’s keeper and the finder of lost children. And I will strike
    down upon thee with great vengeance and furious anger those who attempt to poison and destroy my brothers. And you will know my name is the Lord when I lay my vengeance upon you!

  33. 30/11/2012, Miss Cynical wrote

    I am a first time buyer – currently renting- and saving towards a deposit on a flat in Oxford.

    Should I buy ASAP or wait? It’s difficult to know what to do as there’s so much conflicting advice around. Interested to hear opinions.

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