That American companies have been wadding up huge amounts of cash is no secret. What may be less well-known is that they're also accumulating debt at a much faster pace.
Total debt among more than 2,000 nonfinancial companies swelled to $6.6 trillion in 2015, dwarfing the $1.84 trillion in cash on their balance sheets, according to a study released Monday by S&P Global Ratings. The ratio of cash to debt is the lowest it's been in about 10 years, or just before the global financial crisis.
As financial markets came to grips with the prospect of higher rates ahead, corporate America went on a debt bonanza. Debt grew 50 times that of cash, with companies rolling up $850 billion of new IOUs compared to just $17 billion, or 1 percent, cash growth.
"This jump in debt reflects the scant resistance borrowers faced from yield-starved investors as companies pursued acquisitions and returned cash to shareholders," S&P credit analysts Andrew Chang and David C. Tesher wrote in the report.
What's more, most of the cash is concentrated in the top 1 percent while most of the debt resides with the rest. Total cash balances outside the elite actually declined 6 percent; by contrast, the other 99 percent held $6 trillion of the total debt load. The top 1 percent (25 companies) now controls more than half the corporate cash, up from 38 percent five years ago
The cash-to-debt ratio fell to 12 percent among speculative-grade issuers, the lowest level since before the Great Recession
"There's a common misconception that companies are swimming in cash, when they are actually drowning in debt," Chang said in an interview. "Liquidity is not what it appears."
The surge in debt also comes amid rising defaults. The year has seen 72 defaults, up from 39 at the same time in 2015, S&P reported.
For the most part, defaults have been confined to energy-related issues; 29 are from oil and gas, 12 from metals, mining and steel, and one from utilities. S&P expects the default rate to continue to rise, from 3.9 percent of issuers in the past 12 months to 5.2 percent over the next year.
However, Chang said that while the surge in debt is troubling, it's not yet at a crisis level. Companies are still able to refinance at low rates and have extended duration.
"While we had that initial freeze in the credit market early this year, investor appetite is picking up again," he said. "As of today, credit conditions are receptive even to lower-rated issuers. What we've seen in the past is it doesn't take a whole lot for that sentiment to turn."
Bloomberg reports Japan April Trade Surplus 823.5 Billion Yen, Beats Estimates.
Japan’s exports fell for a seventh consecutive month in April as the yen strengthened, underscoring the growing challenges to Prime Minister Shinzo Abe’s efforts to revive economic growth.
Overseas shipments declined 10.1 percent in April from a year earlier, the Ministry of Finance said on Monday. The median estimate of economists surveyed by Bloomberg was for a 9.9 percent drop. Imports fell 23.3 percent, leaving a trade surplus of 823.5 billion yen ($7.5 billion), the highest since March 2010.
The fundamentals have been inviting: Australia has been in a fully blooming housing bubble. Households are the most indebted in the world, based on debt to disposable income. To maintain the housing bubble, the central bank slashed interest rates to record lows (1.75%). The government wants to keep the bubble going for as long as possible. So regulators close their eyes, according to media reports, to questionable or even illegal lending practices. Home prices, after soaring for years, are clearly unsustainable.
But just because it’s a bubble doesn’t mean it has to implode on schedule
Yves here. In a bit of synchronicity, this post continues the theme of Dipherio’s podcast over the weekend on NAIRU, describing how other central banks around the world look at the issue of what inflation rate to try to achieve and why. I’m a little surprised that Epstein did not mention how the Fed kept interest rates at 2% during World War II, when the US was running massive fiscal deficits and the economy was running well above its theoretical potential by virtue of employing IIRC 6 million women who left the workforce when the war was over. (which proves that setting rates is a political decision that is designed to benefit one class of people or another)
Gerald Epstein: Central banks should be free and open, in conjunction with their governments, to identify the key problems facing their own countries, the key obstacles to social and economic development, and developing tools and targets that are appropriate to dealing with those problems. And these are going to differ from country to country. So, for example, in South Africa, my colleague Bob Pollin, James Heintz, Leonce Ndikumana, and I did a study a number of years ago: We proposed an employment-targeting regime for the central bank. The Reserve Bank of South Africa, in conjunction with the government of South Africa, would develop a set of policies and tools—such as credit allocation policies, subsidized credit, lower interest rates, capital controls to keep the capital in the country, more expansionary and targeted fiscal policy—so that monetary policy and fiscal policy would work hand-in-hand to lower the massively high unemployment rate in South Africa. That’s an example of an alternative structure for monetary policy and one that has worked for other developing countries. So, for example, in South Korea in the 1950s ,1960s, and 1970s, the central bank supported the government’s industrial policy—by lending to development banks that would lend to export industries, by subsidizing credit for export industries, and they would do this as part of the government plan to develop the economy. I call this developmental central banking, that is, central banking that in combination with the government is oriented to developing the country using a variety of tools—interest rates, credit allocation tools, etc..
Not all countries would do the same thing. It not only depends on the country, but also on the problems of the historical conjuncture. So take the United States for example. Right now we do have for the Federal Reserve a dual mandate, which some Republicans are trying to get rid of, for high employment and stable prices. But the financial intermediation system is broken because of what happened in the crisis. Interest rates are down to zero but banks aren’t lending to the real economy. People aren’t able to borrow from banks for small businesses and so forth. The Federal Reserve, through quantitative easing, bought a lot of financial assets but it’s probably time for the Fed to develop new tools, to give direct credit to small businesses, for infrastructure development, etc.
It is the case now, with the crisis and with negative interest rates, or very low interest rates, central banks are being much more experimental trying to develop new tools, new approaches. But they’re all doing it under the guise of inflation targeting. European central bankers were doing all these wild monetary experiments, but their goal was really just to get inflation up to 2%. In fact, what’s happening is that this inflation targeting is no longer the guiding post for central banks. They have to him have much broader sets of tools and targets to get out of this terrible slump that most of these economies are in
So get this: Fagel while at the SEC didn’t just ignore a whistleblower, in the case of Madoff. He aggressively persecuted whistleblowers, even in the face of obvious signs that the CEO who was targeted was unhinged and therefore might not be credible. But after this colossal, embarrassing, and highly public cock-up, the SEC protected and even rewarded him! So why shouldn’t he expect the same generous treatment for his clients who defend and engage in abuses?
So if you ever need a poster child for why the revolving door is terrible for enforcement, you can point in general to the SEC’s industry-friendly position that its intermittent wrist slaps change behavior, and in particular, to the sorry conduct of Marc Fagel.
When Washington took over the beleaguered mortgage giants Fannie Mae and Freddie Mac during the collapse of the housing market and the financial crisis of 2008, it was with the implicit promise that they would be returned to shareholders after being nursed back to health.
But now, with the unsealing of documents this week that were produced as part of a lawsuit filed against the government, new evidence is coming to light on how intimately the White House was involved in the Treasury’s decision in August 2012 to keep all the companies’ profits for the government. That move effectively maintained Fannie’s and Freddie’s status as wards of the state.....
In the law setting up the F.H.F.A., Congress required officials to ensure that the companies were operated in a safe and sound manner with an adequate capital cushion.....
The plan envisages the partition of Syria and empowering the country's "moderate opposition." It should be noted that Washington is well aware that the so-called moderates have no scruples about intermingling with al-Nusra Front terrorists from time to time.
As for Riyadh, it has repeatedly pledged its willingness to deploy Saudi boots on Syrian ground. In the eyes of Saudi Arabia, 'Plan B' will allow Riyadh to ultimately get rid of Bashar al-Assad, paving the way for undermining the Middle Eastern Shiite Crescent and "encircling" of Iran.
Actually, the roots of the US-Saudi 'Plan B' originated in the times of George W. Bush. After Iraq had been occupied by the US, Saudi Arabia urged Washington to shift its attention toward Iran and Syria, parts of the so-called Shiite Crescent in the Middle East.
In testimony before the Senate Foreign Relations Committee in January , Secretary of State Condoleezza Rice said that there is 'a new strategic alignment in the Middle East,' separating 'reformers' and 'extremists'; she pointed to the Sunni states as centers of moderation, and said that Iran, Syria, and Hezbollah were 'on the other side of that divide.' (Syria's Sunni majority is dominated by the Alawi sect.) Iran and Syria, she said, 'have made their choice and their choice is to destabilize'," Pulitzer Prize-winning investigative journalist Seymour Hersh wrote in his 2007 article "The Redirection" for The New Yorker
In a Voice of America report headlined "US still has leverage in Syria," Kerry is quoted thus: "He said the greatest leverage [on Syria] was the fact that [President] Assad and his backers would never be able to end the war in Syria if they declined to negotiate a political settlement."
It is corroborated by the fact that Washington and its allies point-blank refuse Russia's proposals at the UN Security Council to designate other known terror outfits — Jaysh al-Islam and Ahrar al-Shams — as terrorist.
Jaysh al-Islam and Ahrar al-Shams are every bit as vile and barbaric as the other al Qaeda-affiliated franchises. They all espouse the same twisted death-cult ideology; fight alongside each others (when they are not feuding, that is, over war spoils); and ultimately they all share the same sponsors and American-supplied weaponry
It is openly admitted that America's allies Saudi Arabia and Turkey, as well as Qatar, bankroll Jaysh al-Islam and Ahrar al-Shams and that this nexus serves as a conduit for American weapons from the Central Intelligence Agency
Thirty years ago, the exposure of Austrian President Kurt Waldheim’s previous membership in the Nazi Party ignited a political scandal. Today, Hofer’s rise is part of a growing and increasingly dominant international tendency that has significant support in ruling circles. In country after country, right-wing and authoritarian forces are being mobilized to divert the anger and frustration felt by masses of people toward the traditional parties of the ruling class.
This tendency can be seen in the rise of the French National Front, the Alternative for Germany, the UK Independence Party, neo-fascistic forces in Ukraine and the election of Rodrigo Duterte in the Philippines. Most significantly, with the imminent nomination of Donald Trump as the Republican presidential candidate, one of the two principal parties in the United States will be led by an individual with a distinctly fascistic program and orientation...
In similar fashion to the Stalinist popular front of the 1930s, Varoufakis’ policy of shackling workers to the very parties that are carrying out austerity and war is aimed at precluding the development of a political movement against the growth of far-right forces that can actually win mass support. He wants a campaign for “democracy” without changing any of the conditions that have given rise to the danger of fascism. In the United States, the political forces around the Democratic Party are preparing a political movement against Trump without proposing any change to a social policy that has produced an unprecedented transfer of wealth from the working population to the financial aristocracy.
Explaining the crisis of bourgeois democracy in the period between the First and Second World Wars, the great Marxist theoretician and revolutionist Leon Trotsky wrote:
By analogy with electrical engineering, democracy might be defined as a system of safety switches and circuit breakers for protection against currents overloaded by the national or social struggle. No period of human history has been—even remotely—so overcharged with antagonisms such as ours… Under the impact of class and international contradictions that are too highly charged, the safety switches of democracy either burn out or explode. That is what the short circuit of dictatorship represents.Trotsky based his analysis on an understanding that the breakdown of democratic forms was the product of a social and economic system in deep crisis. The task today, as it was then, is to mobilize the working class internationally on the basis of a political program directed against the source of the electrical overload: capitalism.