Following the financial collapse of 2008, just about every major company across the country was on high alert in guarding against taking on any unnecessary debt just in case we were headed for a deeper recession. However, those fears have subsided over the past few years to the point where we could once again be on the brink of a disaster.
The combination of rising corporate debt levels and multiple economic trends could be creating a perfect storm at this very moment, and that storm could create severe problems for many corporations, as well as the consumers that count on them. Let’s take a closer look at four ways that rising corporate debts could wreck the economy in the very near future.
Debt Levels are Rising
The most obvious concern that we need to start with is the fact that corporate debt levels are rising at an unprecedented rate. For a plethora of different reasons, many corporations are being forced to take on debt to the point where they are at serious risk of becoming over-leveraged.
While the fact that corporations are taking on more debt should be an obvious red flag, in many cases those same corporations are misleading themselves when estimating their future abilities to service the debts they are signing up for today. Should they fail to make good on those obligations, the inevitable day of reckoning will be extremely painful.
Competing With E-Commerce
In the retail sector, many stores are finding themselves forced to take on debt to compete with all the e-commerce options that have shifted buying habits over the past decade.
Mom and pop stores in dozens of different retail businesses are barely surviving as it is, and when they realize that they have to compete with sites like Amazon, they often don’t see any choice outside of taking on more debt in order to keep the lights on.
Trump Tax Cuts
Almost every corporate executive believes that the recent tax cuts will be good for their business in the long run, but those same people often miss the fact that part of the new tax policy restricts the amount of interest they can write off on their existing debts.
When corporations that are already struggling with debt are no longer able to write off the interest on those debts, they are likely going to need to sign up for even more debt to make it through, which is never a good option.
Interest Rate Hikes
As if rising debt levels, e-commerce competition, and reduced tax advantages on existing debts wasn’t enough, corporations are also staring down the barrel of more interest rate hikes form the Federal Reserve. The first priority of the Fed is to combat inflation, but that often comes at the cost of higher interest rates for businesses.
With the strong possibility of one or two interest rate hikes still to come in 2018, corporations that are already leveraged to the max are going to find themselves struggling even more as the interest payments on their debts increase.
No matter what industry we are talking about, corporate debt is a serious problem that could have a terrible impact on our economy in the very near future. And while there might not be anything that anyone can do about it, everyone should make a point to protect themselves against this threat, which could very possibly lead to a prolonged depression.