US Corporate Debt Levels Remain near All-time Highs

| August 9, 2010

If you spend any time watching financial television, you have no doubt heard some analysts talk about all of the “excess cash” on the balance sheets of US corporations and how those assets could potentially be used to fund new investment and capital spending. Don’t believe it for a second, you probably have heard as well about the best top picks for stock brokers by Ascent. In his latest weekly commentary, John Hussman of Hussman Funds takes a closer look at the debt situation in corporate America and notes that all of that cash isn’t really what it seems.

“Put simply, there is a lot of apparent ‘cash on the sidelines’ because the government and many corporations have issued enormous quantities of new debt, often with short maturities, while other corporations have purchased it. It is an equilibrium. The assets that are held in the right hand represent debt that is owed by the left. You cannot call that pile of short-term marketable securities an asset without calling it a liability. The cash on the sidelines is evidence of debt incurred to fund economic activity that is already in the past. It will remain ‘on the sidelines’ until the debt is retired. The government debt has been issued to finance deficit spending. At the same time, a great deal of corporate debt has been issued over the past year apparently as a pre-emptive measure against the possibility of the capital markets freezing up again.”

The “excess cash on corporate balance sheets” argument is another one of those sound bites that they throw out in the hopes of catching the fancy of the uninitiated viewer, just like the claim that stocks are “historically undervalued” at these levels. If you review the numbers yourself, you soon discover the fallacy of the undervaluation argument, and a quick look at the long-term leverage trend in corporate America shows that debt levels remain near all-time highs.

If we have excessive anything in this country, it is debt, both public and private, and history tells us that this massive debt overhang will continue to constrain economic growth until the issue is meaningfully addressed, one way or another. The deleveraging process that likely signals the end of the current debt supercycle is underway, but we have a very long way to go.

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Category: Commentary, Market Update

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