This is adapted from a longer version of an article published earlier. Please read at oureconomist.com.
The U.S. Federal Reserve with its creative destruction tools has successfully managed to keep credit flowing into the U.S. economy helping banks and businesses to stay afloat. However, large scale usage of these tools has raised questions on its repercussions. Subsiding financially unhealthy businesses has resulted in a sharp increase in the number of zombie companies which would otherwise be bankrupt. With the Fed having no plans of increasing interest rates anytime soon, the zombie companies will continue to feed on the Fed’s near-free credit for years to come. The unprecedented high number of zombie companies coupled with low interest-rate trap threatens a deflationary spiral once the Fed’s backstop ends.
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