President Donald Trump recently warned of a stock market crash if he doesn’t win re-election in the 2020 presidential election, per The Inquisitr. The warning was contradicted by a Bloomberg News report that suggests that the stock market has experienced more gains under Democratic Presidents Barack Obama and Bill Clinton than Trump.
But that doesn’t mean that there is no trouble looming. Nikkei Asian Review reports that ballooning United States corporate debt, which is already at record levels, puts the risk of a global financial meltdown even higher. The potential crisis is reportedly causing concerns among policymakers and market players.
The debt stems from increasing loans to borrowers with lower credit ratings and already high debt levels. Not only that, Nikkei reports that a newly created index reveals that corporate debt levels are higher than before the dot-com bubble or global financial crisis that resulted from the 2008 downfall of the U.S. investment bank Lehman Brothers.
“The U.S. corporate credit cycle appears to be at its highest point in recent history,” the International Monetary Fund (IMF) said in its Global Financial Stability Report, which was released in April.
In May, Federal Reserve Chairman Jerome Powell delivered a speech that highlighted the risks of corporate borrowing, suggesting that these risks “range from ‘This is a return to the subprime-mortgage crisis’ to ‘Nothing to worry about here,'” adding that the current state is likely in the middle of these two scenarios.
But Daan Struyven, a senior economist in the U.S. Economics research group at Goldman Sachs, believes that the surge in corporate debt is “safer than it looks.” In a recent CNN piece, Struyven suggests that fears of an impending crisis are overblown and lists four reasons that the corporate debt is not too high: corporate leverage that is lower than analyst predictions; a higher tolerance for corporate debt across companies; a safer corporate debt structure than in the past; and a financial surplus in the U.S. corporate sector.
“To be sure, if the economy entered a recession, defaults would rise, corporate credit spreads would widen, and capital spending would decline substantially. After all, the corporate sector is highly cyclical,” he said.
“But our research finds that these risks aren’t any larger than they were in previous cycles and it’s unlikely that high corporate debt will trigger a recession or make it an unusually deep one.”
Although Nikkei suggests that the ratio of corporate debt to gross domestic product in the U.S. has still not eclipsed the pre-crisis level, it suggests that the Federal Reserve will face challenges in its goal of ensuring that the economy doesn’t crash by maintaining a balance between surging corporate debt and a growing economy.