Corporate America teetering on edge of ‘toxic’ debt crisis

US companies have a looming problem of their own making, and it may soon come back to crush them. According to Andrew Lapthorne, head of quantitative analysis at Societe Generale, the amount of debt that businesses have accumulated over 5- 6 years has put them on the verge of a serious crisis.

“This level of borrowing in some sectors of the economy is now booming (with the risk of spinning out of control) to such an extent that we think that the build-up of debt on US nonfinancial corporate balance sheets represents one of the largest mispriced risks in terms of future market stability, downside risk and future economic growth,” Lapthorne wrote in a note to clients on Tuesday.

Lapthorne’s argument is that US corporations have decided to borrow money to fuel growth larger than that warranted by economic demand. But now with the assets backing this debt starting to decline in value, the wheels are going to fall off. Lapthorne believes there has been one cause of this behaviour: central banks.

“Aggressive monetary policy in the form of QE and zero or negative interest rates is all about encouraging (forcing?) borrowers to take on more and more debt in an attempt to boost economic activity, effectively mortgaging future growth to compensate for the lack of demand today,” he wrote.