A second look at a Bloomberg story by Rich Miller, Risky Reprise of Debt Binge Stars U.S. Companies Not Consumers.
Consumers were the Achilles’ heel of the U.S. economy in the run-up to the last recession. This time, companies may play that role.
I bring it up because this:
|Graph #1: Household Debt relative to Total Private Non-Financial Debt|
When household debt goes up on the graph, business debt goes down. And when household debt goes down, business debt goes up.
Household debt has been trending down since 2010 or so. So Miller is right: Companies, not consumers, are running up debt "this time".
But that also happened for ten years starting in the mid-1960s, when we had a lot of inflation. It happened in the early 1980s, when we had a lot of recessions. And it happened in the latter 1990s, when we actually had some good years. So it is not obvious that "companies running up debt" is a clearly defined problem.
I'm doing it again. I just said
it is not obvious that "companies running up debt" is a clearly defined problem.
And the other day, considering Miller's article, I said
Rich Miller sees debt going up, and takes it as a warning sign. He seems to assume that a high level of debt (in dollars) is the cause of the problem.
Sounds like I'm saying debt is not a problem. But that is NOT what I'm saying, certainly not. Private debt is a problem. Private debt is the problem. Private debt.
Looking at the graph, though, you can see that household debt typically stayed between 45% and 55% of private non-financial debt. Except after the year 2000, when household debt went high (and business debt went low).
For the last few years, though, the household portion has been coming down. It is now back in the normal range, between 45% and 55%. Still on the high side, but in the normal range. That means the business portion is on the low side, but also back in the normal range.
What I'm saying is, you can't just look at companies running up debt for the last few years and conclude it's going to be a problem.
On the other hand, household debt remains at a high level. If business debt is getting back into the normal range relative to household debt, then business debt is getting high, too. And total private debt is going up.
That could be a problem.
But you can't just look at total private debt going up and conclude that it's going to create a problem. You have to look at debt relative to other things. The thing that's most relevant, the best context, is base money. Because creating debt is a way to "stretch" base money and make the money support more spending.
When I look at debt relative to base money, I don't see a problem. I see economic vigor in the years ahead.