Joined Nov 11, 2007
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Corporate Debt Ballons, Should You Be Concerned ?

“It’s not just the stock market we have to worry about. It’s also the bond market.

For the past five years, U.S. corporations have been living in a financial paradise. Interest rates have been on the floor. Wages have been flat. Companies have been able to lay off workers and slash costs. Profits have skyrocketed to record levels. And they’ve spent almost nothing on new capital equipment, either.

And what effect has this had?

In 2007, at the peak of the last credit mania, U.S. nonfinancial corporations owed $7.2 trillion according to data compiled by the U.S. Federal Reserve.

Today? After years of this bonanza, those debts have tumbled all the way down to… er… $9.6 trillion.

All that talk you hear about how corporate balance sheets are in great shape is a bunch of hooey.

Corporations borrowed $993 billion just in the first quarter of this year. Corporate debts have actually doubled since 1999.

Yes, during this time corporate assets have also gone up. Companies have built up some cash reserves (mostly offshore, to avoid the taxman). But the overall picture is alarming.

Today U.S. non-financial corporations are carrying debts equal to 50% of their actual net worth. That is near record levels, and far above historic averages.

In 1950 companies barely owed 20% of their net worth. In the early 1980s it was a little over 25%. Even in 2007 it was below 40%.

And this, note, is after years of record profits. Companies have used their profits, and their borrowings, to drive up their own stock prices.

The picture isn’t much better when you look at U.S. households. In a nutshell, a lot of households have reduced their debts — often by defaulting on their mortgages. But at the same time households have been ramping up more debts — in student loans, in car loans, and on their credit cards. In the first quarter of this year households actually increased their debts by $267 billion — even after you count an $84 billion reduction in mortgage debt. Total debts, after tumbling in the early years of the recession, stopped falling in 2012, and have actually been rising again since early last year….”

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