The mainstream media has been ignoring the problem of corporate debt in the United States. While it’s often not thought of, corporate debt can pose a huge problem to the overall economy and lowering interest rates to make borrowing money cheaper won’t solve the crisis.
And low rates won’t solve the coming corporate debt crisis – it will just sustain the number of zombie companies for longer, putting off the reckoning till later, when it will be so much larger. Zombie companies block market niches, kept solvent when economic Darwinism says they should wither and die, opening their market niche to more nimbler new entrants. –Blain’s Morning Porridge, submitted by Bill Blain of Shard Capital, via ZeroHedge
So far, the market consensus is that the Fed will eventually ease lower interest rates. But that won’t ease the pain the economy will feel from the corporate debt that’s at unsustainable levels. It’s how in how the Fed communicates or hints at timing tomorrow that will be most closely analyzed aspect. Expect pages of dot-plot analysis and explanations of whatever he said and meant. Federal Reserve chairman Jerome Powell has already made it crystal clear that the Fed is willing to act to offset slower growth and counter a trade war; “we will act as appropriate to sustain the expansion.”
In a speech delivered on May 20, Powell sounded the alarm about rising levels of business debt, although he dismissed comparisons between the current situation and the conditions in U.S. mortgage markets before the financial crisis.
The swelling corporate debt is definitely bubbling up and could be the catalyst for a global economic meltdown. In fact, U.S. corporations are now more indebted than they were before the Great Recession of a decade ago. That means their demise will be all the more dramatic.
Views about the risks from rising corporate borrowing “range from ‘This is a return to the subprime-mortgage crisis’ to ‘Nothing to worry about here,'” Powell said. “At the moment, the truth is likely somewhere in the middle,” he added.
“The US corporate credit cycle appears to be at its highest point in recent history,” the International Monetary Fund said in its “Global Financial Stability Report,” released in April. The indicators show corporate debt is skewed toward lower-rated issuers, with leverage being close to cycle highs.
An extended period of easy credit has led to loose lending and investment standards, allowing even companies on a shaky financial footing to pile on debt.
The bastion of authoritarian control on the economy, the International Monetary Fund, has even warned about the problem of mounting corporate debt.
The IMF has also recently warned governments to reign in their debt before an economic meltdown, as it’s the only chance the world bank and governments have to survive and remain relevant. Because of this, we should all be taking a long hard look at our own financial situation and see where we can make the cuts necessary to begin the epic task of eliminating liabilities, aka, paying off debt. –SHTFPlan
The general public often glazes over corporate and government debt, while focusing on racking up their own. In a normal economy, led by a free market system, this would be less of a concern. But we have anything but a free and healthy economy. In fact, ours is on life support being propped up only by the central banks, fiat currency, and their unwillingness to pull the plug…just yet…
Corporate debt is so high because, with such low interest rates, it makes good economic sense. Corporations generally employ debt leverage wisely. Not all – but most. It is governments who borrow and spend foolishly. I suspect that, in the near future, those who foolishly loan money to governments are going to get an expensive lesson.
I think it was P.J. O’Rourke who said “giving money and power to governments is like giving whisky and car keys to a 17 year old.”
Actions like borrowing money and then simultaneously buying back your own stock, once felony illegal but post Glass-Steagall evisceration relegated to merely unethical cannot be a sound practice. In the end, regardless of zero rates, they still owe the principal.
“I’ll pay you Tuesday for a hamburger today”.
Kevin, you’re talking about a very specific issue with the banking industry. I’m referring to companies who actually make things to sell. Most companies handle debt responsibly.
“those who foolishly loan money to governments are going to get an expensive lesson.” I loan money to the US government on a regular basis because I buy Tbills. By law that debt is paid first before anything else, the government pays for. So as long as people pay taxes, I will not get stiffed.
I do not recommend investing in any state or local government bonds.
Just prior to the Great Depression, bonds were sold especially to older Americans, as insurance against a drop in the stock market. They lost their shirts.
Recessions and depressions are engineered, plain and simple.
off topic but if the tankers in the straight were hit by underwater mines then why are the holes above the waterline and why would the Iranian boat crew be removing a mine that was stuck to the ship that far above the waterline? Some things make you go hmmmm.
Low interest rates of course allows for more corporate debt; however, investment/savings for real gain is impossible. It’s a loop of logic. Debt must be offset by capital increase of tangible wealth/worth. The balance point between the two has to be set at a much higher point, not lower. Lower of either half of the equation causes someone’s ass to hit the ground on the teeter-totter.
“investment/savings for real gain is impossible.”
Nonsense. You just cannot plop it in a savings account. In low interest environments you have to actually invest in companies that are profitable. That is one of the Federal Reserve’s goals – to force money out of idle savings accounts and into productive businesses.
For instance, take NuStar (NS) or Enterprise Products (EPD). They pay a very good dividend and pipelines ain’t going anywhere.
Everyone is dutifully minding your own math, while household names are kept afloat, by royal decree.
It was by lending money to governments that the Rothschilds were able to take power away from the European monarchs and seize power for themselves. With that power they both instigated war by exploiting rivalries, and then profited by investing in (loaning) to both sides with interest.
They provoked the American Revolution by over taxation and manipulations with the King of England. They got what they wanted, control of England and a Central bank in America owned by them.
Not much has changed. They still have their banks and they are the true Kings now, like it or not.