If you were wondering what the grand total for US business debt is following a quarter during which firms were forced to issue bonds and tap credit facilities to prepare for the worst economic downturn in a century, the answer is $16.8 trillion.
That figure comes courtesy of the biggest annualized jump in total nonfinancial business debt in history.
Specifically, firms added debt at a torrid 18.8% pace (annualized) in the first quarter, as COVID-19 imperiled businesses large and small, driving the economy to the brink of an outright depression. Government debt rose at an annualized 14.3% rate.
The figures (from the Fed’s quarterly report on US financial accounts) will add to a vociferous debate about the extent to which leverage taken on during the lockdowns will ultimately create “zombie” firms, unable to service their debt in the years ahead.
Corporations came into the crisis over-leveraged, and some worry the frantic pace of borrowing has created an even more fragile situation, prone to implosion during the next downturn. The Fed’s efforts to support the corporate credit market helped catalyze more than $1 trillion in investment grade corporate debt issuance during the first five months of 2020, a record pace.
If structural damage to the economy and shifts in consumer preferences manifest in lower revenues and cash flows for indebted companies going forward, the borrowing binge witnessed in the first half of the year could prove toxic, even as the alternative for many businesses was insolvency (or government bailouts) during the lockdowns.
The same Fed accounts data released Thursday shows household net worth collapsed by a record $6.5 trillion in the first quarter.
That, folks, is what it looks like when the vaunted “wealth effect” suddenly slams into reverse.
