Breaking the zero bound has become a rite of passage in the post-2008 world. As Mark Jeftovic noted, “Once a financial market hits the zero bound in interest rates, it’s like crossing the event horizon of a black hole – there is no going back.” Indeed, the number of government bonds trading at negative yields increases every day.
In the new bizarro world where you pay banks for the privilege of giving them your money, one has to wonder what will be the next thing to break the zero bound. When one of the largest corporations in America has over $100 billion in revenue but can’t even make $1 billion in profits, it’s easy to imagine a few possibilities.
American corporations have been playing a musical chairs game where the loser gets taken out back and shot. During the last 40 years, the life expectancy of firms in the Fortune 500 has declined from 75 years to less than 15 years. In what Forbes called “the most important business study ever,” Deloitte released The Shift Index, which compiles the ROI of 20,000 US firms from 1965-2009. The chart shows an 80% collapse in the average ROI of American businesses.
With negative interest rates around the corner, how long will it be until the Fed props up the zombie economy and pushes average profit margins below the zero bound?