I have been lurking on this BB for a few years, and have very much enjoyed following the discussion. (I wish I had taken Marginmikes advice in february 2000...:) )
I have been looking through a document that marginmike posted last week (www.levy.org/docs/sreport/implos.html), and I have some questions about their analysis.
In one chart, they show the debt-to-income ratio for nonfinancial corporations rising to a value of about 6.5 in 2000. Over the last 40 years, this ratio has ranged from a low of 3.5 (in 1980) to a high of 7.0 (in 1989). They comment that with the ratio currently at the high end of this range, that we are vulnerable to a drop in profits, and that, in any case, increased corporate borrowing will be unlikely to contribute to growth, since many corporations are near the high end of their ability to service debt.
Probably they are correct that corporate borrowing will need to slow down, but this current level is not the most extreme we have experienced in the last 20 years, so why should we expect a correction that is more severe than the recessions we have experienced in the last 20 years? Also, although the debt ratio in 1980 was 3.5, the interest rates at that time were much higher, ranging from high single digits to as high as 20% for a brief period. If our current rates remain low, wouldn't one expect corporations to be able to service a higher ratio of debt?
Robin |
