The Corporate Debt Swamp, Or Do Republicans Read the Business Section?
by Charles Lemos, Sat Feb 14, 2009 at 07:03:49 PM EST
What a week it was and it's only the sixth full week of 2009 but don't look now, corporate defaults for 2009 have already reached 25% of the total $157 billion of high-yield-loan and bond defaults in all of last year. As of February 6th, 21 US companies had defaulted on $43.1 billion of high-yield bond and bank debt. But let's add Paul Allen's Charter Communication, the nation's fourth largest cable company, to the list. $8 billion, cha-ching. At the beginning of the week, Muzak Holdings LLC, known for producing background music, and packaging company Pliant Corp. sought Chapter 11 protection. Muzak missed a $105 million payment. Pliant's restructuring plan hopes to eliminate $674 million in high-yield debt. On Thursday, Cleveland-based Aleris International, which produces aluminum products, and the US operations of Midway Games Inc. also ran for Chapter 11 cover. Aleris' liabilities total $3.98 billion but the company secured debtor-in-possession financing that will allow the company to remain operational. As for Midway, it has $281 million in liabilities. In December, the company laid off 25 percent of its work force, or about 180 people even as it negotiated a sale of the company.
According to Moody's, the US is entering a period likely to feature the most corporate-debt defaults, by dollar amount, in history. By various estimates, US companies are poised to default on $450 billion to $500 billion of corporate bonds and bank loans over the next two years. In percentage terms, the credit rating agencies expect defaults on non-investment-grade debt to triple to 15%.
Now connect the dots. The coming default wave is another source of trouble for the global financial system, which already is grappling with hundreds of billions of dollars in defaulted mortgages, credit-card debt, student loans and other consumer debt. Corporate defaults threaten to hurt banks, pension funds and private-equity funds, which in recent years gobbled up high-yield corporate debt and pieces of bank loans. When companies default, it is the shareholders that get wiped out first. Surely, this is common knowledge.
And yet GOP Congressman Paul Ryan of Wisconsin in an op-ed in the New York Times thinks that passing the fiscal stimulus "threatens a return to the kind of stagflation last seen in the 1970s". Now the good Congressman isn't an economic illiterate. He possesses a degree economics and political science from Miami University in Ohio but his column stretches the bounds of credibility.
As Milton Friedman noted, "Inflation is always and everywhere a monetary phenomenon." It is a situation in which too few goods are being chased by too much money.
To American families, inflation is a destroyer of savings, a killer of wealth, a crusher of confidence. It calls into question the value of our money. And while we all share in the pain, the people whom inflation hits hardest are elderly people who live on fixed incomes, those in the middle class who are struggling to save for retirement and college and lower-income people who live paycheck to paycheck.
Combine high inflation and high unemployment and you have stagflation. Hindsight shows how the pain of the late 1970s and early 1980s could have been avoided, yet we're now again planning to borrow and spend -- and raise taxes -- as President Jimmy Carter did. Soon we may again find ourselves watching a rising "misery index" of inflation and unemployment together. If that happens, individual earning power will evaporate, and our standard of living will decline.
To prevent stagflation, we should enact fiscal policy reforms that apply the lessons we learned from the 1970s. Keynesian stimuli based on borrowing and spending have not worked and will not work. One-time rebate checks do not increase the incentive to expand business operations and create jobs. But marginal cuts in tax rates do. We also must lower our job-killing corporate income tax rate, the highest in the industrialized world after Japan, and ease business worries by making it clear that there will be no tax increases in 2010.
I don't expect our members of Congress to be economic policy wonks but I do expect them to read the Wall Street Journal (and not just the editorial page), the New York Times and the Financial Times on a daily basis. If the Congressman from Wisconsin reads these then there is no way he could have written such an op-ed unless he is an free market ideologue. And free market ideology is one thing we can't afford. Gird your loins, as Vice President Biden said recently, for we are headed for a deflationary asset spiral. Stagflation is the least of our worries but Republican economic ignorance, it seems, remains a matter of concern.