Monday, May 25, 2020

Vox Popoli: How debt destroys

Hertz is bankrupt despite owning one of the largest fleets of vehicles in the world:
What one world war, one Great Depression and numerous oil price shocks couldn't do, the coronavirus did in less than three months and late on Friday, auto rental giant Hertz which was founded in 1918 when it set up shop with a dozen Ford Model Ts, quietly filed for Chapter 11 bankruptcy protection struggling under a massive debt load after its business was brought to a grinding halt during the coronavirus pandemic and talks with creditors failed to result in much needed relief.

The company had a total of 568,000 vehicles and 12,400 corporate and franchise locations worldwide at the start of this year.

Last night on the Big Bear's stream, we talked about deflation, and how the debt portion of the money supply is much larger than the cash + bank accounts percentage of it. Printing the latter doesn't help if the former is vanishing at a faster rate.

The Hertz bankruptcy is a good illustration of this. While the corporation still has more than $1 billion in cash, that's only four percent of the total debt it owes. And that's why simply giving it more money to service its debts isn't going to keep it alive for long, as the only thing that will allow it to continue operations is the bankruptcy court agreeing to wipe out a significant percentage of its $24.4 billion in debt.

And that is, as Zerohedge noted, a deflationary bomb, given the size of the company and the price-depressing effects of the liquidation of its vehicular assets. Speaking of those assets, it's interesting to note that Hertz actually listed more assets than debts on its bankruptcy petition, which would seem to indicate that it's not actually bankrupt, but actually suggests that the real total value of its assets are less than recorded.