Monetary Drug Pushers Have Created a World of Corporate Debt Junkies

After Jerome Powell indicated that the Federal Reserve tightening cycle was on pause during last week’s FOMC meeting, Peter Schiff said, “The monetary drug pushers at the Federal Reserve gave the addicts on Wall Street exactly the fix that they had been craving.”

Peter often compares the markets to drug addicts. They are addicted to the easy money the central bank provides. Reuters used that same imagery to describe America’s business community in the wake of the “loose money era,” saying it left a “trail of US corporate debt junkies.  

Many US companies that gorged on cheap debt with forgiving terms over the last decade now find themselves shackled by it, spending much of their earnings paying off lenders rather than investing in their businesses or hiring.”

This doesn’t look good for pundits, politicians and policy wonks who continue to insist the US economy “doing great.”

As small firms, which together account for half of US employment, begin to feel the squeeze, this could have a chilling effect on hiring, wages and consumption, adding to headwinds from wobbly financial markets and ebbing global growth, economists and corporate finance professionals say.”

This was by design.

Of course, the central bankers and Keynesian economists who pushed this monetary policy would never admit they were creating debt addicts. They were just “rescuing the economy,” from a crisis. But what we’re seeing today are the entirely predictable consequences of these policies. The whole point of nearly a decade of easy money was to entice individuals and corporations to spend money and “stimulate” the economy. Like any drug, it felt good at the time. And like any drug, there are consequences to using.  After a 10-year party, we’re starting to feel the negative effects.

America Is Loaded Up with Debt

Between Christmas 2017 and Christmas 2018, the US government added a staggering $1.37 trillion to the national debt. Total consumer indebtedness in the US is rapidly approaching $4 trillion, with Americans currently $3.96 trillion in the red. And in the business world, as Reuters summarized it, “Loans have overwhelmed companies with debt, making the firms the walking dead due to rising costs, according to economists.”

The number of companies struggling with debt has approached record highs. According to the Institute of International Finance, around 17% of publicly-traded US companies had trouble making debt interest payments at the end of 2018. That’s up from less than 10% in 2010.

Meanwhile, the volume of leveraged loans rated as junk or near junk has doubled to a record $1.4 trillion over the last five years. “The leveraged loan market can be considered a canary in the coal mine for the US economy,” Jeremy Swan, managing principal for financial sponsors at accounting firm CohnReznick LLP told Reuters.

As one chief investment officer said, all of this debt “could reduce capital expenditures, capital deployment and lock up the economy.”

This is another reason it is highly unlikely the Federal Reserve will ever resume its monetary tightening. You can’t significantly raise interest rates in an economy built on a foundation of debt.

The debt party is fun when money is cheap. As long as the drugs keep flowing, everybody can party on. But what happens when the junkie can no longer afford his fix?

We got a little taste of what withdrawal was like in the fourth quarter of last year. Now that the Powell Put is on, it appears the markets seem to think the party can continue. But can it? Really?

Peter doesn’t think so.

I think that soon the markets are going to be demanding a lot more from the Fed than just a cessation of rate hikes and a commitment not to shrink the balance sheet. I think what the addicts are going to require is going to be more quantitative easing and a return to zero, and that is exactly what the Federal Reserve is going to provide once it realizes that’s what’s necessary.”

Easy money allows highly leveraged companies that would otherwise go bankrupt soldier on – for a while. But even if they remain in operation these companies aren’t hiring, they aren’t investing in capital. They’re just servicing debt. As Reuters put it, “pullback from investment and hiring can exacerbate an anticipated slowdown and hurt thinly-capitalized non-bank lenders.”

Moody’s Analytics chief economist Mark Zandi called this a fault line in the ecosystem that threatens the broader economy.

I don’t know if we should send off the red flares, but [definitely] the yellow flares.”

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