Debt and American business is nothing new, but according to an article from Yahoo! Finance by way of Bloomberg, corporate debt is at all time highs with no end in sight, and as debt levels increase, the corporate world is drowning in their own borrowed funds and “I-O-U”s.
After tapping the bond market at a record-shattering pace in recent months, Corporate America is more indebted today than ever before.
And while much of that fresh cash — more than $1.6 trillion in total — helped scores of companies stay afloat during the pandemic lockdown, it now threatens to curb an economic recovery that was already showing signs of sputtering. Many companies will have to divert even more cash to repaying these obligations at the same time that their profits sink, leaving them with less to spend on expanding payrolls or upgrading facilities in months ahead.
The over-leveraging of America’s corporate sector is not a brand-new development, of course. It’s been building for more than a decade, ever since the last crisis — the housing-market meltdown — prompted the Federal Reserve to pump unprecedented amounts of cash into the economy, a policy tool that it has taken to new heights during the pandemic as it has supported corporate credit markets.
But in a sign of just how pronounced the borrowing overhang has become, the average junk-rated company had debt levels relative to earnings that were so high in the middle of the year, according to a new analysis by Bloomberg Intelligence, that they almost would have tripped do-not-touch alerts from banking regulators a few years ago. Those warnings back then only applied to a handful of borrowers. Had regulators not opted to drop these warnings, they could today apply to far more.
“An overburdened corporate sector is likely to grow less rapidly and that could slow the whole recovery down,” said Kathy Jones, chief fixed-income strategist for Charles Schwab Corp.
A slower recovery could have wide-reaching implications in financial markets. Many securities prices reflect investors’ expectation that profits will normalize next year, when in fact it could take at least two or three years, said Lale Topcuoglu, senior fund manager and head of credit at J O Hambro Capital Management in New York. She sees many junk bonds as being overpriced.
“It just seems absolutely incredible how much people are closing their eyes and buying,” Topcuoglu said.
Companies have seen their debt burdens grow in recent months as their earnings have plunged in the pandemic. That pain is expected to increase through the rest of 2020 as sales continue to deteriorate compared with the prior year, even if borrowing levels stay the same. (source)
It is important to correct a misconception being noted in the article, and that is that “growth” is happening.
“Growth” is the veritable magic word of the American economy. Everything has to “grow” all of the time, and there can be nothing otherwise, and whoever says such is essentially and economics heretic, when the reality is that, with the natural sine-wave like cycle of business, things grow, age, die, and are born again, and grow, and the cycle continues.
The ideas of perpetual growth is rooted in post-World War II thinking where “growth” was driven by the spoils of war and once that ran out, from financialization, which eventually is leading the US towards hyperinflation by a loss of faith in the currency. This is the root of all “debt spending” that defines corporate life, because it acts as a form of insurance against bad decisions- privatize gains and socialize losses using money printing as the “panic button” when things go bad.
The problems is that the “panic button” of free handouts has been used too much because of too many bad decisions for too long. The result of this is an economy that is eviscerated and there is no real way to alleviate the current financial situation without a major financial collapse, resulting in the death, consolidation, or painful reformation of many companies. While this is not fun, this is a good thing because it will clear out all bad debts as well as all bad debtors, and force accountability from creditors leading to companies having to shut down because of poor lending practices.
No one wants to see pain. However, it is like cleaning out a cut- either clean it now with the pain, or wait for the infection and be forced to clean it, and the US has chosen the latter and is still trying to fight cleaning the wound.
The problems of the corporate world are reflected in the private world, where personal debts have exploded and it is, from a strict view of numbers and profits or losses, nearly impossible for people to earn enough to provide for their families. This is where the COVID-19 stimulus checks are truly a good thing- it is not because they are not destructive to the economy, but for over a decade, the US government has been assuming the bad debts of companies for irresponsible behavior, which is then passed onto the taxpayer burden and is forcing a system collapse. If this is the case, where “non-human” persons (a legal understanding of a corporation) can get “bailouts”, why should not real human persons, who are real people with real lives and not fake zombie-like entities for robbing profit from the public, also receive a financial bailout for themselves, when it is the fruits of their productive, hard labor that is being stolen?
There is going to be no recovery until the debt issue is dealt with, and the way that will happen is that the debt is going to get disowned or the currency will be printed until it becomes worthless, or both. For the average person, it is not to argue about this, but to accept this fact and to prepare for the inevitable.
Corporations are going to drown in debt, and this is unfortunate. However, these same corporations also advocated for policies to strip the average man of his ability to provide for himself in the name of short-term gain at the long-term loss for many. Such entities are simply getting what they forced upon the rest of the nation, and there will be no bailout to save them lest they are either nationalized or forced into bankruptcy.