Excessive Corporate Debt as a threat to the US Economy
There are lots of good reasons for companies to borrow money. In fact it is hard for a company to grow without borrowing money. However too much corporate debt is a threat to the economy. Like any other form of debt borrowing too much money is going to cause problems. There are a number of ways that excessive corporate debt is a threat to the US economy.
The main reason that excessive corporate debt is a threat to the US economy is that it limits the amount of money that can be invested in the business. When a company has debt it needs to pay interest on the amount that is outstanding. That is money that reduces corporate profits and reduces the amount that can be invested to help the company to grow. This over course will limit the future earnings of the business which will cause the economy to shrink. In most cases the interest that they end up having to pay back will exceed the amount that they initially borrowed so the amounts involved are quite large.
Another problem that excessive corporate debt poses for the economy is that it reduces liquidity. All of the money that is tied up in corporate debt can't be used for anything else. Since the money is tied up for a considerable length of time things like corporate bonds are amongst the least liquid of all investments. That means that the money can't be moved quickly or easily to other investments. This results in a tightening of the money supply and inevitably slower economic growth.
The biggest threat to the US economy that is posed by corporate debt is the possibility that the borrower won't be able to pay it back. Bankruptcies are fairly common during tough economic times. When a company declares bankruptcy it is because they have debt that they can't afford to repay. This is far more likely to happen during periods when the economy is weak. The real danger is that the bankruptcy will have a domino effect. It is entirely possible that if enough companies go bankrupt the people who lent them money will also go bankrupt. There is a good chance that these people also owe money to other people who will then find themselves bankrupt. A string of bankruptcies can destroy the economy very quickly.
Another way that excessive corporate debt can be a threat to the economy is that if there is a period of inflation the bond holders will end up losing money. If a company borrows money when interest rates are low and then a period of inflation causes rates to rise it will erode the wealth of the bond holders who will find themselves losing ground. Since they now have less wealth they are able to spend less which slows down the economy. Corporate debt can be a real problem in a number of ways and limiting it is an important part of keeping the economy strong.