Huge Debt Levels in "Cash-Rich" Corporate America

For some time now pundits, and to some extent politicians, have been trumpeting the mountains of cash US corporations have sitting on the sidelines just waiting for ripe opportunity and that, in one fell swoop, could seemingly restore the economy. However, an article this week questions where the cash has actually coming from, and whether it’s as readily deployable as has been suggested.

According to MarketWatch:

“American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression. You’d think someone might have noticed something amiss. After all, we were simultaneously being told that companies (a) had more money than they know what to do with; (b) had even more money coming in due to a surge in profits; yet (c) they have been out in the bond market borrowing as fast as they can.

“Does that sound a little odd to you? […] According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That’s up by $1.1 trillion since the first quarter of 2007; it’s twice the level seen in the late 1990s.

“The debt repayments made during the financial crisis were brief and minimal: tiny amounts, totaling about $100 billion, in the second and fourth quarters of 2009. Remember that these are the debts for the nonfinancials — the part of the economy that’s supposed to be in better shape. The banks? Everybody knows half of them are the walking dead.”

At this juncture, corporate debt is relatively inexpensive. So, it makes sense for companies to stretch out debt repayments, and there’s added incentive for business to refinance older debt and accumulate new debt. However, as the article also highlights, data shows the gross domestic debts of these corporations is equal to roughly 50 percent of GDP, a record level for the past half century. From this perspective, there’s less reason to cheerlead the nation’s presumably sound corporate balance sheets, and the possible revitalization of the economy, than some might suggest.

You can read more details in MarketWatch coverage of the biggest lie about US companies.


Rocky Vega,
The Daily Reckoning