The rescue of the zombie sectors

Governments want to solve this crisis with more debt, more taxes and assistance to the zombie sectors of the economy

Governments want to solve this crisis with more debt, more taxes and assistance to the zombie sectors of the economy.

With huge injections of liquidity, everything is being rescued, especially the zombie sectors, but everything will have consequences. Huge tax hikes ahead.

I reproduce here an article by the Spanish economist Daniel Lacalle, with whom I agree on almost everything.

The main central banks (of the G-10) have increased the size of their balance sheets, injecting liquidity to more than 20 trillion dollars in this crisis. Additionally, governments’ fiscal policy measures already total more than nine trillion dollars. This supposes much more than any Marshall Plan and the biggest injection before a crisis never seen, if we compare it with the GDP and global monetary mass.

This huge injection of liquidity, loans, and government spending has been enough to relaunch markets to levels where much of the downturn with the Covid-19 crisis has recovered.

The fundamental questions are: is it enough? and will it work?

The excess of optimism of the markets in the face of liquidity injections and demand policies make sense: almost everything is being rescued at any price … Above all, sectors that were already excessively indebted, companies that already had important strategic challenges and poor results and margins before Covid-19.

Additionally, the sovereign bond bubble is maintained at all costs and we see how countries that are illiquid and on the verge of not being able to pay their June commitments are financed at negative real rates …

However, the demand for risk from real investors is falling. The flow of funds to equities has been reduced despite the recovery of the stock markets, companies with a long history of existence such as Hertz are forced to default and restructure debt, Argentina is going to its ninth default.

Governments and central banks are drowning the economy in a sea of ​​liquidity and debt.

How can this be? Because a solvency problem and the disaster of unemployment and closure of companies created by the forced closure of the economy is not solved by giving access to credit and liquidity to companies that will not be able to pay those loans due to the collapse of cash, margins and future estimates. .

Additionally, all these measures are aimed at helping to borrow to pay taxes to companies that already had access to credit and with movable assets. In other words, those who already had the possibility of getting into debt are basically rescued.

However, the companies that are falling like flies are those that do not have premises in ownership, do not have movable assets, those that lived from month to month pulling to pay taxes and pay a salary to the entrepreneur and his few employees.

The vast majority of these companies are the ones that are falling day after day and destroying jobs while rescuing with huge bond buybacks from conglomerates that already had access to debt and enormous financial capacity and to states that already absorbed more than 40% of the wealth of the countries.

The redistributive and strengthening effect of demand policies in a supply shock and a crisis caused by the forced closure of the economy is very low. First, because those huge injections and stimulus policies were already showing their very low effectiveness in 2019, with economies already slowing down throughout the eurozone and many emerging countries.

Second, because the little demand that they are going to stimulate is going to occur in sectors that already had overcapacity and low productivity, generating very little additional employment. And, thirdly, because this enormous injection of demand policies will not be accompanied by supply when the ‘output gap’ of the economy has widened enormously.

Much more is not going to be invested and hired in the sectors benefited by the huge injections of liquidity because they were already in the process of slowing down before Covid-19 and, nevertheless, those who have done well, who have not got into debt and who They lived off what they produced month by month, those are plummeting and those who survive will suffer the brutal rise in taxes or inflation (the tax of the poor) that comes after unlimited generosity with the money of others.

The past is being rescued to let the future die. Everything that was in the process of slow obsolescence is going to be rescued because “it is strategic” while the investment in innovation, in disruptive technologies and real change will be decimated through taxation and tax penalties.

This shock should have been accompanied by an immediate reduction in unnecessary spending by states to accommodate the increase in healthcare costs and automatic stabilizers. It should have been accompanied by a tax exemption during the forced shutdown, and a serious plan to cut deficits and spending in 2021.

The only thing that has been done is to add to a debt bubble more debt but aimed at perpetuating the previous excess of administrations that have not reduced any budget and, at the same time, creating a huge increase in debt to companies to pay taxes to a recovery that, every day more, appears in the form of L more than anything else.

They try to convince us that the State has to do everything because there is no other solution. And it is false. Productive capacity, talent, investment capacity and technology are almost intact. But it is easier to close the economy by decree, create a crisis, then put obstacles to international investment and recapitalization and say that “the state has to do much more” …

To achieve this, a mass of money created from nothing is increased, which generates a reduction in purchasing power and the extraction of real wage income and savings and enormous stimulus plans that are only stimulated by what was already more than stimulated. As hundreds of thousands of companies die each month drowned in a sea of ​​liquidity that is dedicated to perpetuating obsolescence and bureaucracy. And when it fails, repeat.

The enormous leverage to the cycle and the absorption of resources from the states to pay current expenses and rescue sectors that, in many cases, were already zombies, will probably generate a much bigger problem of debt in the medium term, falling productivity and worsening speed. of money, less investment and poor growth in real wages …

They will again increase unnecessary spending on bonanza and in crisis as well. They will tell us again that, in the next recession, “it is the State that has to spend”. Until there is no one to squeeze more.

And all this enormous transfer of wealth from the productive and saving sectors to the governments and sectors closest to them will be called “mistakes of capitalism”. Go now.

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