Tear down those mountains of cash
TheGlobeandMail.com – commentary
21 July 2012. Doug Saunders
We’re still calling it a “debt crisis.” And when we feel the jobs sweeping away and the cold hand of stagnation choking off the economy and threatening recession, we tend to search for an explanation by peering into the bottomless pit of debt.
But in most parts of the world, including Canada, debt is not the major problem. That was four years ago. Today, a far bigger threat is pouring down from atop the most prominent and least remarked-upon new addition to our financial landscape: all those teetering mountains of cash.
The cash pinnacles are far higher and more numerous than the debt canyons, and their damage more tangible. Never before in the history of the world has so much cash been hoarded in so many places by so many large organizations. Never before have so many opportunities been missed, so many careers wasted, because money is simply being put aside.
The cash hoards are a consequence of the debt crisis, but that is no longer a credible excuse. Before 2008, companies loaded themselves with debt. Then, in the worst months of the “credit crunch,” when overnight interest rates shot upward and banks stopped lending, companies packed their bank accounts in case credit dried up completely.
Canadian companies have piled up more than $525-billion in cash reserves – almost a third the size of the entire economy – up from little more than $150-billion a decade earlier. According to a recent analysis by the Gandalf Group, at least 45 per cent of Canada’s biggest companies are hoarding cash rather than investing in employment or capital.
None of it is going into research and development, expansion of market share, new offices and factories or, crucially, on employing people. Nor is it going into tax revenues, since cash reserves – and some of the earnings that contribute to them – escape the taxman, giving companies an incentive to not invest.
That’s nothing compared to the United States, where the Federal Reserve estimates that a staggering $5.1-trillion – an amount larger than the economy of Germany – is piling up in American corporate cash holdings.
In Britain, companies have accumulated almost $1.2-trillion in cash and deposits, equivalent to half the entire economy. And, no surprise, investment there grew by only 1.2 per cent last year, during what was supposedly a recovery. Indeed, it appears this frugality has tipped Britain into another recession. And this pattern sadly extends across Europe.
“Until these companies stop stashing the cash and start increasing levels of investment and dividends, the economy will remain on the critical list,” warns Peter Spencer, a British analyst with Ernst & Young.
It’s strange, because this should be a great time for companies to invest: low prices, low interest rates, cheaper labour costs. A sensible company would build up cash during boom times – when investments are more expensive – and spend it during recessions, when consumer demand is weak and capital is cheap.
Yet this is the precise opposite of what actually happens. Companies look at the low consumer demand and become terrified, failing to recognize their own role in creating it.
This has become a public issue. There are some very important reasons why we need investment and spending now – and why chopping down the cash mountains should come before filling in the debt pits.
Unemployment is threatening to cripple an entire generation in many countries. The worldwide food crisis has returned, for no good reason; with more investment, the world could produce more than enough food. There are serious housing shortages in most Western countries. The drive to reduce carbon emissions has stalled, due to a shortage of investment in nuclear and alternative-energy power sources.
If the economy doesn’t start moving, there is something else we could do: start taxing those cash reserves – especially those held overseas. If we make hoarding expensive, companies will find it more desirable to use earnings to increase market share, improve products through research or expand into new markets.
The sinking U.S. dollar and untrustworthy euro have helped: Suddenly, low-return investments, such as African infrastructure, are more appealing than cash in the bank. Governments like China’s see this now. A tax could make companies see it, too.
And if they don’t, then governments will get a bit of cash from them to plug into their debt holes. Nature may abhor a vacuum, but it’s equally opposed to a teetering heap.