Defaults? Depend on it.
The lead financial story January 20th's USA Today was headlined "Are corporate defaults set to rise?"
My answer, before reading, was: of course. As are government defaults - directly, at municipal and possibly state levels, by currency devaluation via printing money at the federal level. As are personal defaults, via rising numbers of home mortgage walk-aways and bankruptcies.
But since it's private sector business that creates real jobs, let's narrow the consideration here to the subject of the article, corporate defaults.
Five U.S. companies and six globally have already defaulted on their debt in 2012, suggesting a pace of more than 60 to come this year vs. the 39 in 2011. While Chapter 11 reorganization filings have been dropping since a peak in 2009, outright defaults have risen and are now, according to the experts quoted in this article, likely to leap. Why? And what does it say about a bigger picture?
The experts pointed to endless borrowing, unmanageable debt and rising debt service and borrowing costs for the weakest. I would also point to a broad surrender to recession by many businesses in every consumer sector, reflected in their price cutting, discounting, limited time special offers and the related sacrifice of profitability for activity. And I would point to the costs and feared costs of Obamacare and other fast expanding government regulatory interference and compliance costs. There is also the giant sucking sound emanating from your I-pad, smart-phones and laptops, where entire businesses and massive quantities of jobs are disappearing - Borders' and Kodak's bankruptcies are good examples.
There are adverse marketplace forces, oppressive regulatory interferences and burdens, this administration's dramatic reduction in available consumer dollars, all converging. Any business on thin ice, essentially operating on debt and constant borrowing rather than profit and living within its means will prove unable to defend itself against these converging forces.
So, yes, it seems to me that a rise in big corporations' bankruptcies and debt defaults and shareholder wipe-outs is inevitable.
Less reported on, less easily seen, the even bigger number of small businesses defaulting on their debts, closing their doors, sending proprietors and employees alike to the unemployment rolls. This is a story told in scattered fashion, mostly by local news outlets covering the demise of some local shop or small manufacturer, and never put together as a national media story. When a Kodak dies, it is national news. But when a mom n' pop camera store in Boise shuts down after three generations, and a handful lose jobs, that's not going to make The Wall Street Journal or CNN. But a few hundreds of those do add up. This is what's going on.
A survey reported January 23rd on Fox, Fox Business and other outlets has two-thirds of businesses forecasting no new job creation and no new hiring for at least the first half of 2012. Analysts ruefully said that none are hiring ahead of demand. And they won't.
But demand is staying in doldrums. The Obama approach has methodically drained consumer spending capability from the economy in many ways. Retirees, seniors and other fixed income investors have been locked in at, essentially, zero yield on their savings for years, thus they have less to spend. Every family with an unemployed member has less to spend. Every small business owner with less revenue (or that is sacrificing profit for revenue) has less to spend as someone else's customer. Every person getting tossed out of health care coverage to go it alone thanks to Obamacare faces large leaps in insurance premiums or deductibles, and thus has less to spend.
Space permitting, I could go on. The lifeblood of the economy is being drained from it through many wounds. And Obama is busy doing exactly what Woody Allen once accused his financial advisor of doing - "My money manager managed my money until there was no money left to manage."
Every sane person knows, if anybody from the government arrives 'to help you,' it's best to pile furniture against the door to block his entry. This week, expressed in pronouncements in his state of the union address, the president is purportedly turning his energies to helping the shrinking middle class. They should fear his help. He has been of no help to anybody but a few cronies and puppet-masters so far - why should the middle class trust in different treatment?
Unless and until government is withdrawn to great extent from meddling, managing, and interfering with this economy, it's going to stay sick and get sicker.
