The Rise of Zombie Companies: How Fed Policy Stifles American Innovation

Zombie companies are mature firms, typically at least ten years old, that cannot generate enough operating profit to cover their interest payments on debt for extended periods, usually defined as three consecutive years where earnings before interest and taxes fall short of interest expenses.

These companies survive not because they are viable or growing, but because they can keep rolling over debt at artificially low costs, a phenomenon first widely recognized during Japan’s “lost decade” in the 1990s.

In the United States, zombies exist across public and private markets and are especially common in capital-intensive or cyclical sectors such as retail, manufacturing, energy, and biotech.

Recent estimates show their numbers rising again: by late 2025, Bloomberg identified 639 zombies in the Russell 3000 index, the highest count since early 2022, with dozens added in a single month.

Broader analyses put the figure closer to 2,000 publicly traded zombies in the US alone out of roughly 7,000 worldwide, marking a more-than-30-percent increase over the past decade when adjusted for new listings.

Federal Reserve studies from the late 2010s placed zombies at about 10 percent of public firms and 5 percent of private ones, a share that held roughly steady through the early COVID period before climbing again as interest rates normalized after 2022.

The single most powerful driver of this rise has been Federal Reserve policy.

Since the 2008 financial crisis, the Fed kept the federal funds rate near zero for nearly a decade, then returned it there in 2020, while simultaneously expanding its balance sheet through quantitative easing to more than $9 trillion by 2022.

QE programs, starting with $1.75 trillion in 2008–2010, followed by additional rounds totaling several trillion more, purchased vast quantities of Treasuries and mortgage-backed securities, driving long-term yields down to historic lows and suppressing borrowing costs across the economy.

Corporate bond yields for even lower-rated issuers fell dramatically, BBB spreads narrowed from around 400 basis points in 2009 to 150 basis points by 2018.



This flood of cheap credit allowed struggling firms to refinance existing debt at rates of 1-3 percent, far below what their weak cash flows would justify in a normal market, and to issue new debt to cover interest payments without ever addressing underlying losses.

During the COVID crisis the Fed went further, launching emergency corporate credit facilities that backstopped up to $750 billion in bonds and loans, including for firms on the edge of zombie status, and created the Main Street Lending Program that channeled hundreds of billions to mid-sized businesses at subsidized rates.

Although these programs did not hand out literal zero-interest loans directly to non-banks, the combination of near-zero policy rates, massive liquidity injections, and implicit guarantees created an environment in which zombies could borrow at effective costs so low that bankruptcy or restructuring became optional rather than inevitable.

Banks, flush with Fed-provided reserves paying almost nothing, had every incentive to roll over zombie loans rather than force defaults and recognize losses on their books.

This policy-induced credit abundance is the dominant causal mechanism. Low rates reduce the financial pressure that would otherwise force unprofitable firms to restructure, sell assets, or exit the market.

Instead, zombies evergreen their debt, crowding out capital that could go to healthier, more productive companies.

Studies from the Bank for International Settlements show that a 1-percentage-point drop in interest rates correlates with a noticeable rise in the zombie share, while firm-level data reveal zombies concentrating in low-productivity sectors where banks practice regulatory forbearance to avoid marking down bad loans.

The effect is not merely correlational: prolonged easy money selects for leverage-dependent incumbents over innovative entrants, distorting the normal process of creative destruction.

Fiscal measures, such as PPP loans, tax deferrals, and Treasury backstops for Fed facilities, amplified the distortion by delaying natural exits even further.

The numbers are stark. US zombies employ more than 2 million workers directly, and global figures reach well over 100 million when including indirect effects in supply chains.

Roughly $1.1 trillion in zombie-related debt is scheduled to mature by the end of 2025, with another large wave due in 2026.

Productivity research links higher zombie prevalence to 0.2-0.3 percent lower annual total-factor productivity growth in affected industries, and zombies have been shown to reduce investment in healthy competitors by 20-30 percent within the same sector.

Corporate bankruptcies reached a 14-year high in 2024, signaling that the long period of forbearance may finally be ending.

Historically, the US zombie share climbed from roughly 5 percent in the early 2000s to 10–15 percent after 2008, a pattern that echoes Japan’s experience where zombies reached 15–20 percent of listed firms and contributed to decades of sub-1-percent GDP growth.

Most people misunderstand the phenomenon by treating it as a recent or firm-specific problem, blaming bad management, the pandemic, or isolated sectors, when the root cause has been sustained central-bank policy that began long before COVID.

The Fed’s actions were sold as necessary crisis response, but they created a long tail of misallocation that persists years later.

Public discussion often overstates the immediate scale (claiming zombies dominate the economy) or understates the long-term damage (dismissing them as harmless temporary holdovers), usually because stability sounds more humane than the painful reallocation that genuine recovery requires.

Hidden assumptions shape the debate.

One is that low interest rates are universally beneficial rather than a selective subsidy for the already indebted.

Another is the belief that central-bank interventions remain neutral and apolitical when in reality they disproportionately favor incumbents and rentiers.

A third is the short-term frame that values immediate job preservation over long-term wage and productivity growth.

Incentive problems compound the issue: bank executives prefer evergreening to protect their balance sheets and bonuses, corporate managers use cheap debt for stock buybacks that boost their own compensation, and politicians support policies that avoid visible unemployment spikes even if the cost is slower overall growth.

Second- and third-order consequences are routinely overlooked.

While zombies preserve jobs in the near term, they suppress real wage growth by locking labor and capital into low-productivity activities, contribute to rising inequality as returns flow to debt and equity holders rather than workers, and inflate asset bubbles that eventually burst with greater force.

When defaults finally arrive, regional economies dependent on a few large zombies can suffer sharp contractions, and the public sector faces higher interest costs, already approaching $1 trillion annually in the US, that crowd out other spending.

The strongest defensible conclusion is that zombie companies represent a policy-created drag on American dynamism and long-term prosperity. Federal Reserve actions since 2008, especially the multi-trillion-dollar QE campaigns and repeated returns to near-zero rates, have functioned as an economy-wide subsidy for unviable firms, allowing them to survive at the expense of healthier competitors and future growth.

Without a decisive normalization of credit conditions and acceptance of higher failure rates, the United States risks a slow-motion version of Japan’s stagnation, with productivity growth stuck below 1 percent and real GDP expansion averaging 1.5 percent or less over the coming decade.

Kai Tutor | The Societal News Team 14FEB2026