The Fed’s Magic 8-Ball Economics: Dumpster Fire Edition

The Federal Reserve’s era of ultra-low interest rates has come to a screeching halt. As rates have risen to combat inflation, many of these debt-reliant companies are suddenly finding themselves in deep trouble. They borrowed cheap money for so long that now they can’t afford the interest payments on their ballooning debt. Imagine waking up one day to find that the credit card you’ve been living on for years has a sky-high interest rate. That’s what’s happening to these corporations right now. And the consequences? US bankruptcies have skyrocketed, hitting levels we haven’t seen in nearly a decade and a half. As of August 2024, the number of bankruptcy filings reached 452, the second-highest in 14 years. In August alone, 63 companies went under, marking the 4th worst month since the COVID crisis. The sectors hit hardest? Consumer discretionary firms (69 bankruptcies year-to-date), industrials (53), and healthcare (45). These industries, reliant on consumer spending and stable operating costs, are collapsing under the pressure of high interest rates and reduced demand. Why now? The answer is simple: as interest rates have risen, it’s become much harder for companies to refinance or take on new debt. Businesses that were just barely getting by—those “zombie corporations” that couldn’t cover their interest payments without borrowing more—are now drowning. They’re being crushed under the weight of their debt as they face higher interest costs and lower consumer spending. It’s a deadly combination that’s pushing them over the edge. And let’s not forget the broader economy. As US consumers pull back on spending, these struggling companies are seeing their revenues dry up, just as their debt obligations grow more expensive. The result? Bankruptcies at a level that rarely occurs outside of recessions. In short, we’re witnessing the slow-motion collapse of zombie corporations, companies that were kept alive artificially by cheap debt. They were never truly healthy businesses—they were the walking dead. Now, as the Federal Reserve raises interest rates, their ability to survive on borrowed money is disappearing. And as more companies go under, the ripple effects will be felt throughout the economy. These bankruptcies are a warning sign: the age of cheap debt is over, and companies that aren’t financially stable won’t make it through this storm. The question is, how many more will fall before the dust settles?