Dear Doug & Max

Doug Henwood dhenwood at
Mon Feb 1 08:54:33 PST 1999

Rakesh Bhandari wrote:

>Doesn't America's recent growth spurt have a lot to do with the assumption
>of rather unbelievably huge amounts of debt by America's leading corps at
>the end of last year for the purposes of business investment more so than m
>& a activity. I just threw away my old Wall Street Journals but there were
>some rather troubling numbers in the money and finance section in the last
>month or so. The problems with this debt driven investment are that the
>terms have not been good due to the on going credit crunch and that growth
>expectations are not strong for this year. Seems to be a deep
>overproduction crisis on the horizon.

After the 1980s mania, debt of U.S. nonfinancial corps peaked at a level equal to 42.8% of GDP in 1989 and stayed there in 1990. Their indebtedness ratio fell to 38.0% in 1994, and then started rising. As of the third quarter of 1998 (fourth quarter numbers won't be out until mid-March), the debt/GDP ratio is back to 42.8%. Since profits were stronger in 1998 than in 1989 or 1990, and interest rates, lower, the debt is much more serviceable for now than it was 8-10 years ago; if profits fall and/or rates rise, then things could get a bit nasty.

What are they doing with the borrowed money? I don't think there are any definitive numbers, but a lot of everything seems to be the answer. Yes, investment is strong - but so are takeovers and stock buybacks. "Free cash flow" - after-tax profits less capital expenditures - went negative in mid-1997 and has stayed there. It was positive for from 1986 onwards, and was one of the driving forces of the bull market. (Firms took the money they didn't spend on investment and stuffed their shareholders' pockets with it.) Historically, the stock market hasn't done well when free cash flow becomes unfree, but no one's told Wall Street about it yet.


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