Op-Ed: What’s wrong with private debt, apart from the headlines?


ByPaul Wallis
DIGITAL JOURNAL
December 28, 2024


The dollar weakened after the release of US inflation data and the Federal Reserve's forecast for interest rates. — © GETTY IMAGES NORTH AMERICA/AFP MARK WILSON

There’s a quietly overflowing bathtub of market news about private debt. It’s growing quite rapidly, and the finance guys aren’t complaining. Private debt is sourced from non-bank lenders.

Private debt is seen as risky. The headlines about private debt, correctly for a change, paint a much more complex picture. Private debt is also seen as an opportunity for investors, private debt funds, etc.

You can be forgiven for thinking there’s more than a slight whiff of “payday loan” in the media image of private debt. There’s some basis for that. Defaults are at decade-long highs,

It’s important not to minimize the complexities of this situation.

Much of this debt has been festering away since before the pandemic. The rise in interest rates has made the original debts more expensive. “Leverage” has been a four-letter word since the 1980s, when people could still read balance sheets.

The almost incestuous relationship between debt and those “great numbers” which usually precede every corporate crash and burn also needs to be understood. Debt first became fashionable in the 1980s. It became a plague in the 1990s.

Only the unnaturally low rates kept these huge debts viable in the corporate environment. Well, that and “creative accountancy”. It’s never been a particularly healthy environment.

Private debt, however, also includes individuals, and small and medium businesses. That’s a sort of confetti-like motif of individual messes. The market never really addresses this very large undercurrent in cash flow.

This multilevel demand for debt is the really significant issue.

It looks far too much like the demand for money to meet rising costs has simply transferred itself to the debt market. There’s nothing reassuring about that. Those price rises in the last few years were massive and cumulative, and the debt market wasn’t exactly in robust health before they began.

The global economy is also not in good shape. The anti-global idiots seem to have forgotten where their money ultimately comes from.

Any expensive breeze could blow down this house of credit cards. Never mind blowing away dodgy loans issued on flimsy credit ratings. Global Main Street is paying the bills, barely, but how much debt can it support?

There’s another side to this which is usually overlooked entirely. Many of these lenders are tough as nails. They don’t make mistakes. I did some work for hard money lenders in California a few years ago. Those guys don’t mess about.

Hard money lending means collateral backing. Ironically, it’s safer for borrowers and lenders than “debt on demand” can ever be.

Even more ironically, it’s the traditional form of moneylending. It’s had thousands of years of practice. Debt is managed by the realities of the loan. You can’t usually even think about on selling a bad risk, either.

Which is where the wheels fall off for soft money loans. This huge amount of capital also increases the amount of money in the market. It supports inflation and price rises in general.

If price rises weren’t supported by debt, they’d be totally non-viable. Nobody would expect markets to simply absorb such big price increases without some sort of balancing act. Debt is in effect creating debt.

The problems are:

So many people also make big money out of writing loans. You can’t expect them to stop and take up basketweaving instead.

In such absurdly deregulated markets, it’s hard to stop people from writing irresponsible loans.

There are laws in place, but those laws had almost no impact in 2008, either.

Taking out a loan right now is incredibly risky because nobody knows what the US economy will be like in 2025.

Let’s put it this way:

Dumb is as dumb does.

The big money is on dumber than ever.

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Disclaimer
The opinions expressed in this Op-Ed are those of the author. They do not purport to reflect the opinions or views of the Digital Journal or its members.