First, there was the tech stock bubble.

Then came fears about a real estate bubble, although the jury is still out on that one.

Now, economists and stock market experts are floating the idea of a debt bubble, in which swelled levels of household and corporate borrowing force an already squishy economy into a longer-lasting, and more punishing, downturn.

Burgeoning household debt is a familiar story, closely watched by economists because they fear it will dampen consumer spending, which has been a vital bulwark against a deeper recession.

But as Federal Reserve Chairman Alan Greenspan and others point to revived business investment as a key to a sustained recovery, those growing corporate debt levels are receiving increased scrutiny: More money devoted to servicing debt means that much less for investment, and more debt overall means more skittish lenders.

"I've been saying there was a debt bubble for about two years," said Jane D'Arista, director of programs at the Fed-watching Financial Markets Center think tank outside Washington. She said the Fed has made the situation worse by fixating on inflation as debt swelled to unprecedented heights.

"The Fed has paid no attention to credit," she said. "This is as bad as having inflation, in terms of what it's doing to the economy."

There's no disputing that, in sheer dollar terms, debt has ballooned. Household debt, including mortgages, has more than doubled since 1991, reaching nearly $7.9 trillion at the end of the first quarter, according to the most recent Fed data. Corporate debt has mushroomed almost as fast, topping $4.8 trillion. Add the debt from other businesses and nearly $10 trillion in debt from the financial sector, and the total exceeds $24 trillion.

That, of course, is more than twice the annual gross domestic product of roughly $10.3 trillion, and dwarfs the ever-popular federal debt, which checked in at a paltry $3.4 trillion at the end of the first quarter.

But debt is a double-edged sword. Companies, for example, have a tax incentive to fund expansion with debt - investments that, of course, can pay for themselves many times over and promote economic growth.

The issue, then, is not necessarily the absolute size of the debt, but how much it strains the borrower.

And by many of those measures, the situation is much less ominous, although hardly ideal.

To assess overall debt levels, the Fed, for example, tracks the debt of nonfinancial companies as a percentage of their net worth. Although it has ticked up slightly since the mid-1990s, it has plateaued at roughly 75 percent over the last four quarters, and is well below the levels of the early `90s, when it topped 90 percent.

A measure used by many economists to assess how well companies can handle their debt burdens - interest cost to cash flow ratio - shows a similar pattern.

"Debt levels today are somewhat elevated, but not out of the range that has been experienced" over the years, said Richard DeKaser, chief economist at Cleveland-based National City Corp. "I don't think we're in that bad of shape."

That, DeKaser said, helps explain why total business bankruptcies - even with the high-profile corporate failures of recent months - have fallen sharply in recent years, even as debt levels grew. The number of personal bankruptcies has soared, setting a record in the 12 months ended in June, according to the Administrative Office of the U.S. Courts, but business filings have fallen by more than 25 percent from the 12 months ended in June 1997.

Not coincidentally, household debt payments as a share of disposable income has crept ever higher in recent months, and at the end of last year approached its highest level in two decades.

DeKaser, who has extensively studied factors associated with corporate bankruptcy, said the debt service ratio is "far and away" the most important factor, more so than leverage, liquidity and other measures of corporate health.

But D'Arista is concerned about what the future holds.

"The problem is, how are you going to repay that debt? It has to be rolled over, refunded or repaid," she said.

She said there's no guarantee that companies can maintain their cash flow. Huge debt loads restrict money for new investment, which retards growth in jobs and personal income. Facing heavy debt loads themselves, consumers are less likely to increase their own spending, which further crimps corporate revenue and profit growth.

"It is a self-fulfilling cycle," she said.

Paradoxically, growing concern about corporate debt comes at the same time many economists are encouraging Greenspan and the Fed to cut interest rates even further to encourage more borrowing.

The economic slowdown has done little to curb companies' debt accumulation - overall levels actually shrank during and after the last recession, the Fed data show, but have continued to swell this time around. The $4.8 trillion corporate debt outstanding at the end of the first quarter is up 4 percent from the year-earlier quarter, and up 12 percent from the 2000 first quarter.

In recent years, companies have increasingly turned to the bond market rather than bankers for loans. As the Fed cut rates, new corporate debt issuance jumped last year, according to the Fitch rating service, topping $1 trillion.

But defaults also have soared - reaching 10 percent on speculative-grade debt, according to Standard & Poor's, up from less than 2 percent for much of the just-ended record economic expansion. Although Fitch reported in August that the pace slowed in July, the rising defaults mean the Fed rate cuts haven't been fully passed on to borrowers, with spreads between government interest rates and bond yields rising sharply.

It's clear that growth in corporate debt has been spread unevenly. Despite all the incentives and rock-bottom rates for the best clients, some companies are finding it all but impossible to borrow, and some CEOs have no interest in boosting spending in such a dicey economic climate.

"Loan demand continues to be very weak, simply because money is relatively cheap and relatively available, but only to certain borrowers," said economist Donald Straszheim of the California-based Straszheim Global Advisors consulting group. "There's a major borrowing segment that is shut out of the markets right now."

Indeed, although a Federal Deposit Insurance Corp. study earlier this year found that business credit overall was more available last year than in previous recessions, a National Association of Manufacturers survey at the same time found that a third of small and medium-size manufacturers said credit had grown more difficult to obtain.

The experience of Elk Grove Village, Ill.-based SigmaTron International Inc. illustrates all too vividly how low interest rates don't necessarily translate into increased investment spending.

The small manufacturer of printed circuit boards, like so many companies, saw its stock price climb sharply after its 1994 initial public offering, but its growth slowed in the late `90s, and the company found itself in violation of elements of its lending agreements.

Last fiscal year, the company was able to return to profitability, and this spring it successfully renegotiated its loan agreement.

But it hardly received carte blanche. Banks commonly include limits on capital spending in loan agreements, for example; the new deal, according to Securities and Exchange Commission filings, allows SigmaTron to spend only $1 million on capital expenditures per fiscal year. That's down from a $5 million cap in the initial 1999 agreement, and well below its purchases of machinery and equipment in six of its past eight fiscal years.

SigmaTron officials declined to discuss the effects of the new deal or its financial situation beyond the regulatory filings, but these capital-spending limits could crimp growth at a company that had shed more than 700 jobs from 1999-2001, but added 200 in the fiscal year ended April 30, according to its annual report.

And while corporate debt levels may seem abstract, that, D'Arista said, is the rub.

"The household sector simply has to have disposable income - it has to repay debt as well," she said.

"The only answer is more disposable income, and that's wages. Where is that going to come from?"

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© 2002, Chicago Tribune.

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