America’s Debt Crisis Starts in Corporate Suites

“A blizzard of bargains and a new generation of video-game consoles helped kick-start the Christmas retail season,” quoth a worried Wall Street Journal the Monday after Thanksgiving. “But shoppers didn’t show up in overwhelming numbers, and their purchases were sensible and selective.” What’s more, other auguries have turned adverse, according to The Journal –lipstick sales are up, which we are told occurs when women don’t have the money to buy more expensive merchandise.

And the ordinarily chipper New York Times business page hung as much crepe as holly, declaring that “consumers did not swell the crowds the way they did last year, and it is still unclear whether they will spend robustly enough to pull the economy from its downturn.”

The months pass, and the economy is up and then it’s down, it’s sick but it’s getting better, it’s basically O.K. but doing poorly, it needs a tonic but not too much–and on second thought, we’d better do nothing and wait. Perhaps we don’t know where we’re going because we’ve never been there before.

At no time in our recent history has the country been in a comparable set of circumstances. The elements have aligned themselves into a pattern that has no parallel. We have wandered onto terra incognita, and as for predictions, we shall see what we shall see.

Never before in the modern era has the public sector had its debt problem nicely in hand while the private sector is drowning in obligations. The government has forgone its nasty way of piling on debt, whilst corporate and individual debt must be measured in numbers usually used to describe the distance between the stars. The country is soaked, saturated and perfused with debt. The numbers are too big to be visualized. Not counting banks and other financial institutions, American corporations had, as of 2000, rung up a record $4.5 trillion in debt–up 67 percent from the previous five years–even as households have upped their borrowing almost 60 percent, to $6.5 trillion.

The creditworthy have taken on more than they can carry, but so have the credit-unworthy, who in times past would not have been able to borrow a dime from a loan shark, let alone take out mortgages and get their hands on credit cards. These borrowers, the so-called subprimes, are but one new and additional factor, and although it’s estimated that in the last 10 years mortgage lending to them ballooned from $27 billion in 1990 to more than $430 billion, they don’t begin to constitute the largest pool of bad debts. The money lost lending to the fiber-optics industry and telecoms has been put at the trillion-dollar level.

The easy incompetency with which money was made available in the teeth of business prudence rivals the worst excesses of the Pentagon or government social-welfare programs. The dot-com story of waste is another oft-told tale, but the whole economy is littered with similar wrecks, which may not be as huge but still aren’t small. During the late, great boom, tens of thousands of trailers were sold to people who, even in the best of times, needed the overtime wages of full employment to pay for these shelters–which, unlike ordinary housing, lose value as they age. Now the overtime has ended and the repossessions have started. Hence, it should come as no surprise–even though it did–that Conseco, the largest lender in the high-risk housing market, has executed 25,000 repossessions this year.

Conseco, this one company, has $26 billion tied up in trailer mortgages–money it had to borrow, so that there’s a chain of borrowers and lenders running off over the horizon, all of whom must take the loss if and when the subprimates default on their mortgages. The prospects of Conseco’s customers paying back those loans is considered so poor that the people who follow finance are bracing for the company’s going bankrupt sometime next summer. As things stand now, almost a million and a half people will jilt their lenders by filing for bankruptcy this year. On average, each filer will owe $54,000, so somebody (or many somebodies) is going to be stiffed to the tune of $54,000 times 1.5 million. My calculator begins to choke when having to deal with so many zeros, but that’s a helluva lot of money to go up in smoke.

The government, God bless it, hasn’t been idle in face of this situation. It has forced down interest rates–motivated primarily, one suspects, by the desire to keep stock prices up. But at the same time, it has enabled home owners to refinance mortgages and credit cards by the millions, thus giving them lower monthly payments, which should help keep many people from defaulting. Nevertheless, if you have to devote much of your income to paying off debts, there’s less left for buying, and buying like crazy is what we ought to be doing to keep the buoyancy in the economy. But how long can a person with an old soup can keep bailing out a rowboat before his arms tire and the boat sinks anyway?

It’s hard to say to what extent corporations have been able to take advantage of lower interest rates. Some of them have called in their old, high-interest rate bonds and refinanced them as home owners have done, but some haven’t had the luxury. AT&T, which has been cursed these last years with idiots for managers, has had to borrow a mere $10 billion at interest rates as high as 8 percent, and if that doesn’t serve as the final kibosh on a once-great enterprise, the news will come as a happy surprise. Hence for some companies, there are no low interest rates as long as they’re regarded as high risks.

According to the script, when interest rates are low, companies will borrow money to buy new equipment, expand and so forth. In other words, they’ll take advantage of the cheap money to refurbish and get modern. Well, the airlines won’t, for one. Many companies won’t make new investments if they don’t see the customers lined up out there for whatever it is they’re selling. Borrowing at 2 percent means nothing to them if they can’t see how to make 3 percent on the money, and that isn’t easy at a time when corporations are eking out smaller profits because of the competition, or because people won’t buy at higher prices. That’s been the situation with the auto business of late: They can only sell cars when they cut prices. So it remains to be seen how enticing low interest rates will turn out to be.

Complicating matters more is the chronic overcapacity of certain areas of business, particularly in manufacturing, mining and agriculture. Since a pure, free-market business world exists only as a wacky construct in heads of economists, we never know what to do about money-losing businesses which are of historic social and political value.

There are a host of other problems. The social conventions make it easier to fire or lay people off than to cut their hours and salaries, as they do in Japan and France. Gender and diversity may play a part as to who stays and who goes. Thus do certain rigidities rob managers of a degree of flexibility.

In the good (or were they the bad?) old days, at least one of these problems–debt–was resolved by bank panics. Staved by worthless loans, the banks closed their doors and, in a matter of days, companies all over the country were out of business and their employees out on the street. In that quick and painful manner, the debt was blown out of the system and everybody could start over again. That’s not going to happen with us.

It has been occurring to some analysts that, given all the above, the United States may drift into a long static period à la Japan, in which growth is minimal and prices slowly drop. In other words, a gentle deflation of values. I doubt it. We don’t do anything in a gentle way; we’re always going overboard. Whatever it is, we tend to do it big time, so a gentle deflation isn’t our style.

Also mitigating against entropy of this kind is the Federal Reserve. The government is printing money like a long-haired man with a flowing neckpiece, trying to inject it into the veins and arteries of commerce. If it succeeds too well, we’ll have an inflation. It won’t be the first time we got out of our debts by repaying our creditors with cheap money, but who knows–with a little war here, a marvelous new invention there, a tax cut somewhere else, who can say that we won’t fiddle, fuddle and fudge our way out of this yet.