Easy Money, Voracious Uncle Sam

Chidem Kurdas


Like President Truman, some market observers may have wished for a one-handed economist as they listened to Janet Yellen. On the one hand, suggested the Federal Reserve Chair, economic indicators are on the whole favorable and a single-month bad jobs report does not change that. But on the other hand, acknowledging the somewhat mixed picture the Fed will not start raising rates shortly as was previously expected.

Mostly likely it will not take significant action to tighten the money faucet until after the presidential election —if then. Contracting credit can cause a recession and Ms. Yellen assuredly will not want to harm Hillary Clinton’s chance to be elected President.  Donald Trump, the presumptive Republican nominee, understandably wants to replace Ms. Yellen.  Whether he gets a chance to appoint a new Federal Reserve Chair is a key question.

There’s more to Fed policy than economic fundamentals or the presidential race. Even with the low rates, businesses are not borrowing as much as in the past. Business debt as a fraction of assets remains low. Non-financial corporate credit market debt in proportion to net worth is about 35%; it was 45% in 2009 and around 50% in the early 1990s.

Credit, like the economy, wears an on-the-one-hand-and-on-the-other aspect.  “We’re very bullish on the credit market,” says Tim Donahue, head of high-yield and leveraged loans at J.P.Morgan. “People need return.” Speaking at a conference organized by Debtwire, he pointed out that high-yield bonds and loans are the only place to get higher return.

But Mr. Donahue also warned that high-yield debt issuers have to take advantage of windows of opportunity as investors move from risk-off to risk-on and back again. Risk appetite is volatile. Don’t expect certain types of loans to go back to previous levels, he said. He and others see less leverage and fewer buyers of debt due to the regulatory regimen instituted by the 2010 Dodd-Frank Act.

Who’s benefiting from cheap credit? Household borrowing is up but a large chunk of the easy money returns to Uncle Sam.  Federal government debt continues to grow not just in amount –$19.2 trillion–but relative to national output. Government debt as a percentage of Gross Domestic Product rose above 105% in the first quarter of this year and is some three percentage points higher than a year ago.

Growth in government debt is expected in recessions, but the ratio to GDP continues to expand years after the 2008-2009 recession ended ….


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