Matthew C Klein, Columnist

When a Dividend Signals Weakness

Low interest rates and a lack of attractive investment opportunities means that companies are borrowing huge sums to buy each other and pay dividends to shareholders, rather than make productive investments.

April 23, 2014 at 7:09 PM UTC

By Matthew C Klein

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange. Before that, Klein was a research associate at the Council on Foreign Relations, where he spent more than two years studying the history of the Federal Reserve and the intellectual history of monetary economics for an upcoming book by Sebastian Mallaby. He also worked at Bridgewater Associates, where he studied the economies of Central and Eastern Europe and advised institutional investors on asset-liability management. Klein has a bachelor's degree in history from Yale University. Originally from Chicago, he lives in New York.

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The frothiest corner of the fixed-income markets seems to have missed the memo that the Federal Reserve is lifting its foot off the gas. Despite concerns last summer that a reduction in bond-buying might wound the global economy by making it harder to borrow, Bloomberg News reports that U.S. companies owned by private-equity firms are borrowing more money than at any point since the go-go years. The New York Times reports today that the French company Numericable Group SA is poised to sell the most junk bonds ever, breaking the record set by Sprint Corp. in September. And lenders are barely getting any compensation for the risks they're taking.

You might think that all this corporate borrowing is exactly what rich countries need to finish recovering from the great recession. (Today's new home sales are a sobering reminder of how weak the U.S. economy remains.) Unfortunately, most of the new debt isn't being used to finance productive investment or hire additional workers. Corporate spending's contribution to U.S. economic growth shrank considerably from 2012 to 2013.