The Corporate Debt Market: Is It Teetering on the Edge?

By: Joseph T. Salerno

Jeff Peshut answers the question that has been widely discussed in the media lately: Is There Really A Corporate Debt Bubble That’s Ready To Burst? 

To unravel the mystery, Peshut compares movements in the Rothbard-Salerno TMS monetary aggregate with movements in corporate business debt from 1978 through 2017.  At the end of 2017 corporate business debt stood at $29.1 billion or about $10 trillion above its post-crisis trough at the end of 2009.  TMS reached its cyclical trough of $5.1 trillion at the end of 2006 and increased to $13.1 trillion, a breath-taking increase of 156.9%, by the end of 2017.  For the sake of comparison, during the housing bubble TMS increased by “only” 70%, from $3.0 trillion to $5.1 trillion from 2000 to 2006. The year-over-year (YOY) rate of growth of TMS has precipitously fallen from over 7% in 2016 to less than 4% at the end of 2017. The huge increase in the money supply from 2009 onward would certainly lead us to suspect that there is a systemic overvaluation of asset markets that will sooner or later come to a bad end.  But the trillion dollar question is, of course: When?

With respect to the corporate debt market, Peshut gives us a cogent ad informed forecast.  He finds that in the last three complete credit cycles, from 1994 through 2009, the trough in the YOY growth rate of TMS has preceded the trough in the YOY growth rate of corporate business debt by about three years in each case.  Given this three-year lag, even if TMS has already reached its trough, Peshut concludes that claims that the corporate debt bubble is about to pop are premature and the more likely scenario is that the bubble bursts in 2021 or 2022. 

Powered by WPeMatico