Why is low debt for a company good in high inflation?

Discussion in 'Economics' started by milktruck, Jun 10, 2010.

  1. Hugh Hendry, while having a deflationary bent, suggests that the end game is currency debasement, and suggests quality, low debt, blue chip, dividend paying stocks for this part of the game. something like that anyways. Im puzzled why low debt levels is so good, since on the surface it seems like a get out of jail free card, but I have a few ideas:

    1 Low debt will allow the company to survive the deflation that precedes the currency crisis

    2 A business model that functions without debt has no roll risk when interest rates rise to reflect inflation and they have to issue way lower/cant issue new debt

    Anything else? Am I wrong?
  2. High debt is bad because of what happens when business slows down a little and the company cant pay its bills.

    Low debt is good because you have that much more profit to expand your business, hire the best employees to make business more profitable, or just put money in your own pocket.

    Just because there is high inflation, doesnt mean more people are buying your product. And even if they are, you are spending more for stock, rent, and labour. You also may need a loan to pay for those 3 things up front and with high debt, you might not get it and risk going bankrupt.
  3. Companies that have high debts now are likely dependent on continual borrowing to keep things going. High inflation -> credit freeze up -> dead duck.

    There are some companies that have high debt for one-off type reasons and aren't regularly dipping into the debt markets, and they could indeed benefit from across-the-board high inflation, but those types of companies are pretty rare.
  4. Makes no sense...

    If I am a fixed-rate borrower, high inflation is the best possible thing that can happen to me.