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April 7, 2005

America's Corporations: Credit Card Junkies Like The Rest Of Us

-- by Thomas Leavitt

I woke up this morning, picked up the paper(*) as I walked out the door, and found this: Triple-A credit rating takes corporate pounding, at the top of the Business section. Summary: Corporate America's credit-worthiness is at an all time low... far worse than in 1980.

I think the author, by focusing on the near disappearance of AAA rated firms, misses the bigger story (a huge shift in the overall quality of corporate creditworthiness, and the number of firms with "junk" or near-"junk" grade credit). I'm also annoyed by the "spin" that this is merely a re-balancing of corporate priorities between bondholders and equityholders. Nevertheless, the article makes it absolutely clear that Corporate America is as debt-ensnared as any other sector of our society. I'm not surprised, but at the same time, I haven't seen this laid out so starkly anywhere before.

This completes the triumvirate... every sector of our society (public, individual, and corporate) is massively overextended.

Want more information... horrifying stuff? The Grandfather Economic Report, put together by Michael Hodges, has a ton of it.


Did you know that America's total debt exceeds $40 trillion dollars (not counting unfunded liabilities of various sorts)? That's ~$136,500 for every man, woman and child in the country... and counting. Did you know that household debt as a percentage of national income has been soaring like a rocket, and that the ratio now exceeds 100%? Or that the percentage of equity Americans hold in their homes has dropped to 55%? (scroll down)

Setting aside the author's political leanings (libertarian/limited-government), the overall picture he paints (very carefully documented and sourced) is pretty damned horrifying. Why isn't this the number one item on our elected representatives' agenda?

The author also links to an article on the housing bubble -- the source is suspect (a Lyndon LaRouche associated newsletter), but the information in it is troubling, to say the very least... how deeply leveraged is the entire housing market? Is it vulnerable to a Long Term Capital Management style financial market meltdown (with far greater consequences)? If I had more time, I'd try and find more information from a less suspect source. Anyone care to do that, and post a link in a comment below?

--Thomas Leavitt

* Yes, I do subscribe... although only because I got a super-deal from the SF Chronicle last year at San Francisco Pride... $82 net for a full year's subscription after receiving a $50 Safeway Gift Card. I sincerely believe that part and parcel of being an informed citizen is subscribing to a daily newspaper... and yes, the Chronicle is a sorry ass rag, compared to the Los Angeles Times of my youth, but - it still keeps me somewhat in touch with the flow of the culture; not to mention putting the occassional very informative piece of information in front of me, and/or provoking me to dig deeper on a subject.

Posted by Thomas Leavitt at April 7, 2005 2:11 PM

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Comments

Think about why corporations go bankrupt. It is ALWAYS because their flow of revenue begins to exceed their expenses plus debt.

No debt = no bankruptcy unless your product isn't worth what it costs to produce, deliver and sell. The latter is adjustable. Debt isn't.

High debt levels mean an economy that can't handle economic shocks without losing a lot of companies. You know - financial shocks like a drop in the value of the dollar or a sharp increase in the cost of oil, or the resulting slow-down in the economy after interest rates and/or inflation go up.

The American economy isn't as robust as it has been since WW II. This debt is just another canary in the mine shaft of financial disaster.

Posted by: Rick B at April 7, 2005 7:12 PM

But isn't a debt-free corporation a target for raiders? Leverage the acquisition price, and then strip the acquired company of assets. I thought this was one of the ways that economic law and policy enabled finance over production.

Posted by: nihil obstet at April 8, 2005 7:29 AM

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