Why is the Fed creating incentives for US corporations to destroy themselves? Why is the Fed pushing insurance companies and retirement funds into bankruptcy? Why is the Fed raising interest rates when inflation is still well below its 2 percent target?
Things are not always what they seem. In theory, the Fed’s low interest rates are supposed to have a positive impact on the economy by spurring a credit expansion. But it hasn’t worked out that way. Bank lending has remained stubbornly subdued throughout the post-crisis period. But what hasn’t remained subdued is corporate borrowing (via the bond market) which has exceeded all previous records increasing the probability of massive corporate defaults sometime in the next two years. Here’s a good summary of what’s going on from an article in Fortune titled “Corporate America is Drowning in Debt”:
“A good portion of Corporate America may have a serious debt problem. According to a report released Friday from S&P Global Ratings, the bottom 99% of corporations, when it comes to the amount of cash they have, are increasingly showing worrying levels of debt.
Studying S&P’s universe of more than 2,000 nonfinancial corporations, S&P’s researchers found that corporate issuers of debt had on hand a record $1.84 trillion in cash. But that statistic doesn’t tell us very much about the health of individual companies, because it appears cash is more concentrated at the…