We worry so much about government debt that we missed the building of the corporate debt bomb. This debt bomb will go off when the next recession starts. The result could be an explosion of bankruptcies, but massive currency devaluation is more likely. In either case, gold and silver may be the only safe havens left.
While households started reducing their liabilities after 2008, corporate America just kept piling up new debt. According to the Federal Reserve, non-financial corporate debt in the US rose from 3.4 trillion dollars in 2008 to over 6.2 trillion dollars by 2018. This debt is nearly twice what it was before the 2008 financial crisis. Remember how credit ratings collapsed on supposedly safe bonds? Today's corporate debt bomb is potentially worse.
We won't be able to blame the credit rating agencies this time because they are already warning us. By 2018, Moody's rated just 27% of outstanding corporate debt as high quality. They rated 56% as medium grade, and 17% is already in the junk pile. There isn't much room for error. When the next recession strikes, medium grade corporate bonds will be at risk. Corporate debt could become the subprime mortgages of the next financial crisis.
The subprime mortgage bubble produced real houses, but the corporate debt bubble is just inflating stock prices. S&P 500 companies spent over 500 billion dollars a year buying back their own shares in each of the last four years. Firms are essentially borrowing trillions of dollars to prop up their stock prices. They won't have houses or other real goods to sell when the market crashes, and the international situation is also worse.
China's debt binge over the last decade was even more spectacular than America's. At the beginning of 2008, China's total non-financial corporate debt was equal to about 125 billion dollars. However, BIS statistics show that this Chinese debt rose to over 3 trillion dollars by the beginning of 2018. Risky emerging market debt now plays a far larger role in the global economy.
Low interest rates on government bonds are forcing American investors to look elsewhere, but corporate bonds are too dangerous. For a little more interest, some savers are sitting on the corporate debt bomb and hoping it doesn't explode. Eventually, there will be another full-scale market crash and supposedly safe corporate bonds could default again.
There is a safer way to get higher returns. Gold has a higher expected rate of return than bonds. When the defaults come, gold will be there to protect you. Even when the politicians start printing money again to stop the defaults, gold will still hold its value. There is no reason to sit on the corporate debt bomb when you could be sitting on a gold mine.