Navigating Economic Turbulence
There is no denying it, economic headlines look pretty muddled these days.
A few examples…U.S. corporations are filing for bankruptcy at an unprecedented rate, unlike anything we have seen since 2010. Over 50,000 U.S. stores could potentially shut their doors by 2027, and on top of that, millions of fast-food workers are at risk of losing their jobs within the next five years. What is important to understand the headlines because they can portray exaggerations that are designed to stir emotions rather than convey nuance.
To start off, the rate of U.S. corporations filing for bankruptcy has spiked, reaching the highest it has ever been in 13 years. This comes at the effect of rising interest rates and tightening credit conditions. However, it is noteworthy that that these higher interest rates are not high by historical standards. It’s simply that companies have been weaned in cheap money for so long that even a modest increase feels like a shock in today’s economy. The businesses struggling are those that could not adapt or streamline their operations to accommodate these changes. In some ways, this reckoning is a natural corrective measure, exploiting the businesses with unsustainable models.
We are seeing an uptick in bankruptcy filings from large companies, with more than 236 in just the first four months of this year. However, we must recognize that this does not mean every large company is floundering. Many of these businesses, like Bed Bath and Beyond and Vice Media, were struggling long before rates rose. The reason they survived is in thanks to their access of easy money which acted as economic life support that cannot last forever. Bankruptcies are not inherently bad; they are an important part of the economic life cycle, ensuring only the strong and viable businesses survive.
As for fast food workers facing job losses due to the likes of automation and AI, this might seem concerning on the surface. However, this transformation could lead to increased efficiency and lower prices for consumers. It’s not a death sentence for employment, but rather a shift in work. As economist Joseph Schumpeter argued, “creative destruction” – the dismantling of old economic structures to make way for new ones – is a “fundamental driver of capitalism.”
These headlines can be scary, but they are not cataclysmic. They reflect the natural ebb and flow of economies, the birth and death of businesses and jobs. The key is to allow these changes to happen, for old models to fall and new ones to arise. We must resist the temptation to prop up falling business or sectors artificially, or as we like to describe Zombie Companies. This is how economic stagnation arises.
As we navigate this economic turbulence, let us remember that change is inevitable and is not only a terrible thing. It is necessary for an economy to grow and develop in the proper way. It is the force the pushes us to new heights and to ultimately progress in a new world. So, brace yourselves and buckle up, we are in for an interesting ride.
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