Imagine the household of John & Jane Doe with 28k in their checking account and an annual pre-tax gross income of 125k. For the sake of argument, assume they have some of the world’s craftiest accountants, meaning their yearly tax and accounting bill combined is only about 15k. Throw in 45k of living expenses (like food, insurance, cars, etc…), and this leaves the Doe’s with 65k in disposable income. It sounds great so far, but we haven’t considered their debts (like credit cards, student loans, auto loans, mortgage, etc…) nor the interest on those debts. Unfortunately for John & Jane, they are about 2 million in debt. Fortunately, that debt is financed at a meager rate of 1.35%. So the total interest they paid last year was only 27k (.0135 x 2 million). This left them 38k of disposable income, hardly enough to put a dent in what they owe.
With all that in mind, what do you suppose happens to the Doe’s if their creditors suddenly said, “pay us in full - or we are going to triple the interest rate.” With only 28k in scratch, they cannot pay in full, so instead of spending 27k/yr on interest going forward, they will be spending 81k/yr to service their debts. This puts them in a position where they are working day after day, month after month, year after year, to bring home disposable income, which is not even sufficient to pay the interest on what they owe. It is only a matter of time until they are in Bankruptcy court. They are, for all practical purposes, Debt slaves. Walking, talking Zombies.
While many of you reading this might claim this scenario is no more realistic than actual zombies. The idea of someone making 125k and getting 2 million in debt, or interest rates tripling, seems unrealistic. The thing is, though, Bag did not pull these numbers out of thin air. These numbers came from the Income statement & Balance Sheet of JP Morgan Chase, the world’s largest bank. Sure, the “k” (standing for thousands) in the above two paragraphs will need to be replaced with a “B” (for billions) - but other than the six zeroes which differentiate the two, the numbers are the same. JP has 28B in cash and gross revenues of 125B. They spend about 45B on wages and another 15B on taxes & professional services. In the trailing 12 months, they have paid 27B in interest on their debt (customer deposits & long-term debt). Their debt, by the way, is a staggering 2,000B - or, stated another way, 2 trillion.
For those who prefer to see all this in a table format:
John & Jane JP Morgan
Cash: 28k 28B
Gross Income: 125k 125B
Expenses/wages 45k 45B
Taxes & Prof Services 15k 15B
Net income 65k 65B
Total Debt 2000k 2000B
Interest paid on the debt 27k 27B
Effective interest rate on debt 1.35% 1.35%
Historically speaking, well-connected corporations like JP can finance their debt at a percent or two above-prevailing interest rates, set by the Fed. For most of the last decade, those prevailing Fed rates have been at or near Zero. This is what allows the JP’s of the world to pay an average of only 1.35% on their debt, just as they have in the trailing 12 months. Unfortunately for the JP’s of the world, the last 12 months have seen the Fed raise interest rates to a shade under 5%. To make matters worse, the vast majority of JP’s debt (like all corporations) is revolving because they haven’t the cash to pay it off. So as it matures, it will have to be rolled over at prevailing rates - something north of the 5% fed rate, let’s conservatively call it 6%. When you divide 6% by the 1.35% they have been paying, it means the amount of interest they will have to pay going forward will explode by a factor of 4.4x!!
Not only will this dwarf disposable income, it effectively wipes out their gross revenues as well. No more money for wages, taxes, or accountants. Some of you may be quick to point out JP has a huge asset in its “loan” portfolio - which generates massive cash flow, and could be tapped to make ends meet. Bag would admit that is indeed true. The problem however resides on their balance sheet, where their accounts payable are 2.5x the size of their accounts receivable. In other words, for every dollar they are owed, they owe $2.50. This is an unsustainable problem …. or in keeping with the theme, a zombie bite.
Lest you think Bag is indiscriminately picking on JP Morgan just because the numbers work, know this: It isn’t just JP Morgan. It is damn near every corporation in the S&P 500. You name it ….Home Depot, Disney, Pfizer, Delta, Harley-Davidson, Verizon, Target, Walgreens, Toyota, hell, even Mcdonalds… are all in debt up to their eyeballs. For ALL of these corporations, Interest payments are one of the largest drags on their cash flow - and that’s based on the friendly rear-view interest rates at generational lows, of near Zero. As the debt of these corporations comes due and needs to be rolled over, the pain of the current interest rates will begin to make itself felt. The ballooning interest payments will hollow out the balance sheets & income statements of all these corporations, without exception. They are all on borrowed time. The prevailing 5% interest rates are the zombie bite that will inevitably turn corporate America into an apocalyptic financial wasteland.
Bag will continue to hold out hope he is wrong, though with math being as unforgiving as it is, he has no idea how he could be wrong. Perhaps one of you could explain it….
Hum? I hope they get screwed, however they will take us all down - to big to fail - so on second thought, not so sure. Hum!
I wonder how much they all borrowed combined to buy their own stock back?