Independent Institute: Will Corporate Debt Set Off the Next Financial Crisis?

Article by Alvaro Vargas Llosa in Independent Institute

Artificially low interest rates and monetary manipulation of the kind that the developed world, and more specifically the United States, have witnessed since the last financial crisis have consequences. One of them has been the ballooning of corporate debt in this country.

Regardless of how corporate America has used its access to tons of cheap new credit all these years (many companies, as is well known, have simply used it to buy back their own shares, whether it made sense or not, just to make their earnings per share look better), the result today is a highly dangerous level of debt at the heart of the economy.

Corporate debt was not one of the big culprits of the financial crisis a decade ago. But it might well be next time around. It has now reached $10 trillion, which means it is 60 percent higher than it was a decade ago. Its total size amounts to about half of the total size of the U.S. economy.

These realities are hidden below the surface of what currently looks like a dynamic economy with a rate of growth of 3.2 percent, according to the most recent data, and extremely low unemployment figures. It has always been the case with the consequences of currency manipulation and artificial monetary stimuli—until those hidden consequences eventually come bursting out into the open, setting off a financial crisis across the system.

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