Hardly a day goes by without some politician or pundit pointing out that companies are hoarding cash _ roughly $3 trillion of it. If only they would spend it, the thinking goes, the economy might get better.
But the story is not as simple as that. Though it seems to have escaped nearly everyone's notice, companies have piled up even more debt lately than they have cash. So they aren't as free to spend as they may seem.
"The record cash story is bull market baloney," says David Stockman, a former U.S. budget director.
U.S. companies are sitting on $358 billion more cash than they had at the start of the recession in December 2007, according to the latest Federal Reserve figures, from June. But in the same period, what they owed rose $428 billion.
Before the recession, you have to go back at least six decades to find a time when companies were so burdened by debt.
Companies borrow money all the time, of course. They borrow to build factories, cover expenses, even make payroll. The problem: Debt doesn't go away. A business can cut costs during a recession. But it can't just shred the IOUs.
Heavy debt means companies could have to dip into those reserves of cash to pay their lenders. And when interest rates eventually go up, companies will have to spend more money just to service the debt.
In the last recession, which ended in June 2009, small businesses that depended on credit cards and bank loans got slapped with higher rates just as sales began to drop. Some got cut off all together.
Peter Boockvar, equity strategist at Miller Tabak & Co., says business debt is too high even if the U.S. manages to stay out of a second recession. If economic growth doesn't pick up, "they'll be more bankruptcies, and more defaults," he predicts.
Even if companies used cash to pay off what they owe, they would be left with plenty of debt _ in fact, an amount equal to 83 percent of all the goods and services they produce in a year, according to Federal Reserve data for incorporated businesses.
In March 2009, the low point of the Great Recession, companies owed 95 percent. To stay afloat, companies tapped credit lines at banks, increasing debt while they were bringing in less money. They burned through cash to meet expenses.
Before that, though, it has been at least six decades since companies owed so much money as a share of what they produce, says Andrew Smithers, a London consultant who has written extensively about debt.
In short, American business is awash in cash like a man who borrowed from a bank is rich. He may have plenty of money in his pocket, but he still has to return it.
Already, there are signs that companies are struggling to pay off debt. Since this summer, buyers of bonds issued by deeply indebted companies _ called junk bonds because they're so risky _ have been demanding 14 percent more in annual interest. Some companies haven't been able to sell bonds at all.
The financial picture is at least better for the biggest, publicly traded firms. Non-financial companies in the Standard & Poor's 500 are making more money than ever and adding to their cash fast. It's middle-sized and small companies that appear to be most vulnerable.
"There are almost two economies out there _ the big S&P 500 companies, then everyone else," says Michael Thompson, managing director of S&P's valuation and risk strategies.
But this sunny picture for the largest companies is marred by debt, too. Since the start of the recession, S&P 500 companies have borrowed an additional 44 cents for every additional dollar they've hoarded in cash. For many companies, debt has risen more than cash.
Drugmaker Pfizer added $3.5 billion to cash from the start of the recession. But it added $28 billion of debt, according to FactSet. PepsiCo added $22 billion more debt than cash. Hewlett-Packard added $16 billion more, Wal-Mart $13 billion.
The lack of fear about debt is an about-face from the recession. Back then, Wall Street was worried that many companies had borrowed too much during the boom, and would suffer for it in the bust.
The expectation was that this "wall of debt" would cause some companies to fail. Others would struggle but ultimately pay their lenders. Either way, borrowing would ultimately fall.
But that didn't happen. Instead, the Federal Reserve slashed benchmark interest rates to near zero, lowering yields for conservative investments like money market funds and pushing frustrated investors into riskier corporate bonds offering higher returns. As demand for those bonds rose, businesses were able to issue more of them than ever, and use the proceeds to pay off old ones coming due soon.
"The Fed encouraged debt refinancing, but we need debt extinguishment," says Boockvar. "It's bought time, but it doesn't deal with the fundamental problem."
That problem could upend the expectations of investors. Many are banking on companies using cash to buy back more of their own stock, which might lift sagging prices.
Smithers thinks high debt will eventually force companies to do the opposite _ cut buybacks.
And given the big role these purchases play in the market, that could wallop stocks. Smithers says that buybacks by non-financial companies over the past decade have more than compensated for the wave of selling by individuals and mutual funds.
The problem with debt is you don't need an actual recession to cause trouble for companies, just the fear of one. Spooked lenders can hike rates on new loans needed to pay off old ones, or cut companies off completely.
For companies issuing those risky junk-rated bonds, that day has already arrived.
A maker of private planes in Kansas saw rates on its bonds jump 40 percent in just a month. And on Wednesday, a shipping company in Florida filed for bankruptcy because it was unable to borrow to pay off old loans.
"They thought, `We survived that one and we won't have another for 10 years,'" says Martin Fridson, global chief credit strategist at BNP Paribas Investment Partners, speaking of the Great Recession. "But the economy is not out of the woods yet."