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The 'bubble' of debt gets formed as corporate bonds keep getting stacked, mainly concerning non-financial institutions. As per the process, a lender buys bonds from the company and a certain amount of interest. Since individuals or corporations issue loans to companies who ask for them, the bonds they acquire are known as corporate bonds. The US economy has faced crisis in the past because of the increasing value of corporate bonds.
Currently, the corporate bond market has a massive $10 trillion debt 'bubble', according to the Federal Reserve and SIFMA. However, before discussing how this situation could be resolved, let's have a peek into corporate bonds' history, which plague the US economy.
The Past Blows of the Debt Bubble on the US Economy
The USA has a history of the corporate bond market. The first real blow of corporate markets' debt bubble on the US economy was in 2008. This financial disaster was called the Global Financial Crisis (GFC) of 2007-8. The value of securities associated with American real estate crashed because banks had started giving out risky loans and offering more leverage.
Matters related to debt have only gotten worse from here. The global debt percentage rose from 84 per cent in 2009 to 92 per cent in 2019, and the amount is massive, approximately $72 trillion. It would be wrong to assume that the world's leading economies' financial situation is better than that of developing states.
Countries like the US, China, Japan, France, Spain, Germany and Italy collectively had a debt rate of about $34 trillion in 2009, which rose to about $51 trillion in ten years. Out of this, the debt 'bubble' created by non-financial company loans and interest would make up for about $13 trillion worldwide. In 2020, out of the $13 trillion, almost $10 trillion was the USA's share.
Why The Corporate Bond Needs Urgent Attention
The data mentioned above shows that the financial situation is more urgent in the eight leading economies. This could be because nobody takes the corporate bonds market and the debt incurred by them seriously. Even stock markets get more serious attention than the corporate bond market.
This takes us back to the basics of making money-related decisions. It is always advisable not to borrow more on credit than you can pay your lenders back. However, it is not always easy to abide by when it comes to launching big ideas, and the corporations that show trust in startups help in the growth of the economy.
Hence, one easy-going attitude of banks issuing too many risky loans to companies in 2007-2008 resulted in the US economy's crashing.
The corporate bonds market might look better when interest rates are lower, but it is not stable. Thus, it becomes increasingly important to look forward to the future. It is a massive setback for the US government if they appear to the nation's people as unprepared to deal with economic crises.
The Effect of the Pandemic on the Corporate Bonds Market
The pandemic took a significant toll on the mental and psychological health of the masses. It also greatly affected the economic health of nations globally. Although the corporate bonds markets' debt 'bubble' has not yet made the economy crash, experts expect massive repercussions.
The Federal Reserve has somehow kept the economy afloat by allowing loans to several companies that were incurring significant losses due to lockdowns and decreasing sales. This fares well for the needy; however, it creates a pile of problems for the future. With passing time, the debt bubble will keep intensifying, and the question will no longer be if the economy can provide loans to its citizens but if they can meet their obligations.
As of now, several zombie companies referred to as 'fallen angels' in America are so drowned in debt that they can hardly make enough to pay off the obligations on time. They have no extra resources left to invest in expanding businesses or attracting a more extensive consumer base. Such companies with huge corporate debts would include Macy's, Heinz and so on. Experts are still struggling to understand how these companies have not entirely crashed.
The answer is simple; after 2008, borrowing got more accessible in the USA. But the resolution to the crisis that the US economy is gradually going deep into will only get more and more complicated with time. The lower interest rates might appear a part of benevolent policy presently. However, when the economy collapses, public faith in the government will be utterly shaken again, just as it had been in 2008.
Source: CNBC, Bloomberg Quint, The Whitepost, The New York Times