In recent years, American businesses have been navigating a troubling landscape of ever-increasing debt. As highlighted by the Securities Industry and Financial Markets Association, nonfinancial corporate debt surged to over $9.1 trillion as of November 2018. This staggering figure raises serious questions about its implications for the economy and the businesses that compose it.
So, what does the $9.1 trillion figure signify? What potential pitfalls loom ahead? Let’s delve into the details.
For starters, this enormous amount of nonfinancial corporate debt represents nearly half of the real U.S. gross domestic product (GDP). Essentially, private enterprises have required a considerable increase in debt to secure their profits, often at the worst possible moments.
Think of increasing corporate debt as a ripe tomato on a grocery shelf—it becomes rotten swiftly and without warning. Frank Holmes elucidated the dire situation in an article for Forbes:
“By 2023, about $4.88 trillion of this debt is set to mature. Due to rising interest rates, many firms are starting to struggle with their interest payments as their debt continues to outpace U.S. economic growth, according to the Institute of International Finance (IIF).
“Moreover, the fastest-growing category of debt consists of riskier BBB-rated bonds—just one step above junk. This represents the most precarious corporate bond environment we’ve ever witnessed. Combined with stricter monetary policy, it could lead to significant challenges in the near future.”
But there’s more to the story…
The Weight of Dishonesty
While $9.1 trillion in nonfinancial corporate debt stands at nearly half of real U.S. GDP, it is also nearly double the amount seen just before the financial crisis a decade ago.
This alarming statistic is akin to a flashing red warning light, signaling serious dysfunction. In 2007, prior to the Great Recession, total nonfinancial corporate debt was about $4.9 trillion. Today, it has risen by 86%, indicating an unprecedented risk of calamity.
The current nonfinancial corporate debt situation is so troubling that it seems inconceivable how companies could accumulate such monstrous liabilities in a functioning, honest system. This points to a deeper problem—the financial system is fundamentally flawed.
The foundation rests on the Fed’s fabricated money and manipulated interest rates, which have misled the economy. As evidence shows, when a financial environment is built on a dishonest debt-based system, ever-increasing levels of debt become necessary to achieve even minimal growth.
As businesses stumble and debt continually surpasses profits, the proposed solutions only worsen the cycle. The answer to excessive fake money and affordable credit is to issue even more of both. Simply put, a dishonest financial system requires an ongoing cycle of deceit to remain functional.
So, where do we find ourselves now?
Advice for Fed Chair Powell
The staggering figure of $9.1 trillion in nonfinancial corporate debt represents the dark reality of compounded dishonesty. In a truly honest financial system, such a reality would be utterly unacceptable, reducing the ambitions of American capitalism to a mere punchline. Yet, this grim situation is merely a predictable consequence of a dishonest financial framework, one propelled by a relentless pursuit of debt.
The Federal Reserve’s attempts to normalize monetary policy—raising interest rates and trying to shrink its balance sheet to pre-2008 levels—appear to have failed dramatically, especially given that the corporate debt market is struggling to adapt.
As noted by Frank Holmes, $4.88 trillion of the $9.1 trillion in corporate debt is set to mature over the next four years. The clash between accumulated dishonesty and harsh reality is coming, and it will likely unfold predictably.
Many corporations might find themselves unable to refinance this debt at rising rates, leading to an increase in defaults and a significant downgrade of many debts to junk status.
Behind closed doors, President Trump and Fed Chair Jay Powell are clearly anxious. Trump desires lower interest rates and artificial stimulus to bolster GDP growth ahead of the 2020 election, as his reelection chances heavily depend on it.
Meanwhile, Powell is acutely aware that the economy is precarious; estimates indicate that annualized GDP growth for the first quarter of 2019 was only around 1.3 percent. However, he feels unable to respond decisively without inciting market panic.
Frankly, Powell finds himself in a no-win situation. Regardless of his actions, President Trump will continue to publicly criticize him. Given these circumstances, it may be wise for Powell to consider alternative employment.
Nonetheless, Powell holds a powerful opportunity. With a decisive stroke of his pen, he could enact real change. By increasing interest rates genuinely, he could jeopardize President Trump’s reelection efforts while also dismantling the corrupt system of compounded dishonesty.
Our advice to Powell: You have nothing to lose—take the plunge!
Sincerely,
MN Gordon
for Economic Prism
Return from Unsolicited Advice to Fed Chair Powell to Economic Prism
