 All right, zombies, zombies, zombies everywhere. We've talked a little bit about the potential for zombies in the U.S. economy and the challenge that's gonna pose once these zombies start going abust because as interest rates go up, they now can't really afford the debt that they've taken on at higher interest rates. The only reason they've survived is because in a sense they were bailed out by government through low interest rates. Well, the zombie phenomena is not unique to American, it's not unique to the current situation. I mean, Japanese companies during the 1990s were held afloat through government policy by Japanese banks that made loans not based on the ability of the company that they were loaning the money to pay it back, but they were making loans to companies in order to sustain those companies as zombie companies who would then employ people. That is the mandate in Japan at the time was no unemployment. You cannot have unemployment in this lasted for decades and banks were basically doing the government's bidding by keeping companies afloat to prevent unemployment and of course what that does, what does this do? Whenever you see zombie companies, what it does is it takes away all the market discipline. It prevents companies that are not sustainable economically from going bankrupt. Bankruptcy is really, really, really important in a free market economy. Bankruptcy is a way to clean out the muck, to redeploy capital, to increase productivity by getting rid of the least productive businesses in the economy. So it is a great mechanism for reallocation of capital to its more productive uses and it's crucial. A healthy economy is economy which allows for bankruptcy. This is why the United States I think has done so well in spite of all the recessions and economic problems. It's because we deal with it pretty quickly in spite of the government's bailouts and everything else. We allow companies to go bust. We allow reallocation of capital and reallocation of human resources and that happens. Japan didn't let it happen. It went into this last several decades and it's never really recovered from the crash of 1990 and the consequent, in a sense, government and bank bailouts. And so this is kind of background to the story of today which is an article by I guess an economist who writes a lot about finance, real estate, economics up at Gupta. And he's writing about, look, something obviously horrific is happening in the Chinese economy. A lot of people are trying to explain it. It's real estate and some people saying it's a lack of consumption, kind of a Keynesian explanation of the motto. The government needs to stimulate more. The government needs to encourage people to consume more and offer more welfare. Maybe it's suppression of entrepreneurs, the tech sector, government intervention in the tech sector, suppressing economy. And he says all of those explanations might have something to do with it. And he's, I think, most dismissive of the kind of the Keynesian motto justifiably. But he says there's one other factor that we have to take into account and that is that China is an authoritarian regime. And authoritarian regimes do not allow companies to go bankrupt because companies that go bankrupt create unemployment and that creates instability and it suggests that the government doesn't know what it's doing and the government is in bad shape and the economy's in bad shape and that creates, you know, negative, negativity in the economy and the governments don't allow the bankruptcy. So which union is like this? Communism generally like this. And fascism is like this and Chinese fascism I think is the same way. He says the real problem in China is fundamentally a political problem which does not allow companies when they are no longer productive, when they are no longer making a profit to actually shut down, close down and have their resources reallocated. And he provides a bunch of graphs and economic arguments and graphs and extrapolations over this. And this is happening primarily in the state-owned sector, state-owned enterprises and the Chinese economy where the government has direct control but it's also happening in the private sector because like Japanese banks, Chinese banks are being instructed to keep private companies afloat through cheap loans and through loans that would never be made because they're too risky just to keep these companies going, zombie companies. So much of the state-owned enterprises, maybe a majority of state-owned enterprises or significant number of them are zombies and quite a bit of the private sector are zombies. And the consequence of this is as you've seen over the last really 10 years a significant decline in the return on investment, the return on assets, return on equity for these companies both in the state-owned and in the private sector really driven by this zombie phenomenon, driven by government intervention, not allowing markets to clear. This is I think an important sentence from his review which I think is right on. He says, China's growth decline is fundamentally a political problem. Not one of inducing entrepreneurs to work harder but in the inability to enforce market discipline and allow the appropriate functioning of price signals. So this is kind of a Heikean story of the market is not functioning, you're not getting prices. Of course, prices get distorted by zombie companies because they are willing to buy stuff even when it doesn't make sense for them to buy stuff at prices that it doesn't make sense. They constitute demand when they should be bust and there should be no demand for products. So zombie companies in America, in Japan, in China, in old communist countries, always distort and provoke prices and allocation of capital and resources. And I agree completely that this is a massive, massive issue in China right now and one that is gonna be very, very difficult for China to solve and this is why I've told you I'm so pessimistic about China because it's not clear how you solve this at all because of the politics. How do you solve this without freedom? The solution is, of course, free markets. The solution is getting government to back off from its involvement in the economy but that's unthinkable to a regime like China that is so authoritarian.