In the first quarter of 2019, US total public and private debt amounted to nearly $ 70 billion, according to the Institute of International Finance research. The federal government's debt and debt from private companies, outside the banks, hit new heights.
Debt in itself is not bad. Borrowing can help governments and businesses grow by funding key projects and services that make the economy stronger. And right now, the US can still handle its debt burden. The economy, about $ 21 trillion, remains healthy, and the Federal Reserve is preparing to cut interest rates and make debt even cheaper. But America's near-drawn commitments can be dangerous down the road.
America's economy is starting to show some cracks. Production is slowing down, and the commercial war damages economies around the world.
The United States remains one of the most attractive places to invest, and the government bond remains a safe bet for investors. But if the economy slows, the US must continue to rely on investors ̵
It will probably still happen. But the United States does not make matters easy for itself.
The government has not borrowed money since March due to congressional-authorized loan limits. If a violation government does not maintain or temporarily suspend the debt ceiling, the United States can rely on its debt, increase its borrowing costs and potentially throw the global economic system into chaos.
In the long run, however, there are lighter economic conditions from central banks, including the Federal Reserve, "will support further debt accumulation, aggravate concerns about debt burden and government debt sustainability," wrote IIF analysts led by Emre Tiftik, Deputy Director of Global Political Measures .
The Fed is expected to cut interest rates by the end of the month.
But lower prices would only be a limited help in lowering US interest rates, which amounted to $ 830 billion annually in the first quarter. If Fed cut rates by 100 basis points, or 1%, this bill could be around $ 20 billion to $ 25 billion a year, IIF said. It's not something, but interest remains a financial burden for the United States.
Last year, investors were already concerned about the so-called twin deficit – which includes the US budget and balance of payments deficit, or the gap in the country's global trade. Although the market may have moved on to other issues, the twin deficit is still alive and kicking – and growing.
Corporate Credit Assembly
Corporate America's debt situation is not much better.
An increase in bank lending has contributed to non-financial corporate debt climbing to new heights: 74% of GDP, according to IIF.
With the Fed preparing to cut interest rates, this trend is unlikely to reverse. Lower prices may allow companies with a large debt burden to breathe a mild sigh because it becomes cheaper for them to refinance. But it will also invite companies with poor credit profiles to continue lending for less in the open market.
Corporate America's profit is expected to have fallen in the second quarter, the second direct decline. And Wall Street analysts expect it to happen again in the current quarter. That means some companies may not be able to afford to repay the debt if the market and economy take a turn for the worse.
"Increasing concern about earnings prospects underscores the risk of high-yielding businesses," the analysts write.
Higher debt burden will also not do much to improve business sentiment and investment, which has already been damaged by the commercial war
Concerns about rising debt levels are not limited to the US.
The global loan balance is over $ 246 trillion, nearly 320% of worldwide GDP, and only shy of the all-time high it reached in the first quarter of 2018. It generally means that the world is borrowing more than it produces. It is to live beyond its means, so to speak. Such a massive pile of it puts the world – and emerging markets in particular – at risk of sudden shifts in market conditions.
If conditions change rapidly, it may be more difficult for countries with low credit quality to refinance outstanding debt.
The loans are expected to grow as developed central banks change their attitude towards relief. This can undermine "sub-campaigns and reigniting concerns about long-term headwinds to global growth," said IIF.