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Schumpeter: The Union states of debt

POLITICS in America may be an arena of mutual incomprehension with few settled facts, but the debate about the health of American firms’ balance-sheets is, if anything, even more bewildering. On one hand are those who complain that America Inc. is hoarding $2trn of idle cash, on the other are those, including the IMF, who yells that firms are bingeing on debt, with borrowing hitting an all-time high of $8.4trn last year.

DEBT STATUS OF AMERICAN FIRM

There are debt, cash and the profits that go to making interest payments. For the current members of the S&P 500 index, excluding financial firms, all measures have inflicted in the past decades. Debt has lifted by 114% and cash by 162%. But the real matter here is the size of the firm’s net debts relative to profits. Comparing these is rather like deducting the cash in your bank account from your debts and comparing the net amount to your salary. Some firms are more “geared” than others. But the share of the total debt owed by highly leveraged firms has been fairly stable over time.

Even if American firms have spent a decade ignoring the Federal Reserve, they have altered their behaviour in response to the economy’s three ills:

First, their distrust to the financial system means they carry a bigger buffer of cash and liquid assets. They do not entirely trust anyone. For every dollar of gross profits, they carry 1.25$ of cash.

The second change is that firms have had to adapt to a flimsy tax code that is stuck in the 1980s, before business globalized. About half of the cash of S&P 500 firms remains offshore.

The Third change is those companies’ profits have lifted, that resulted in the declination of the economic competition.

God help America

Both debates, that America Inc. Has lost its nerve and have become carefree are wrong. But the corporate world’s clean balance-sheet does carry risks like:

One is that the complete intermediary of money may be invested unwisely since this corporate world is a place where the disclosure is not proper.

Another risk is that any rise in profit, make it harder to service debts. Antitrust watchdogs could get tougher with telecoms and cable-TV firms, for example, pushing earnings down. Or the labour market could tighten, pushing wages up and prompting the Fed to raise interest rates.

Conclusion

That is not what many CEOs expect.  The American firms are determined about the fact that the disappointing status quo of high profits, muffled competition, sluggish wage growth, and dysfunctional political and financial systems will continue for a long time to come.

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