Lately, I have been reading on almost a daily basis of how cash on hand at corporations is going to start a string of M&A, rising wages, and get the economy going again.
A little history first. Back in 2008, the credit markets were freezing up, M&A collapsed and companies started feeling the pinch for liquidity as many of the corporate paper markets fell apart. Any company that could issue bonds or get loans did (Major deals come to mind are Goldman Sachs and Buffet), but those were companies with high credit ratings and they paid crazy rates for that capital.
Long Story short, the FED greased the wheels and the credit markets opened up and MOST companies went out and got some cash by issuing bonds and taking credit lines out of fear that when they needed the money they wouldn’t be able to get it.
Now fast forward to 2010.
Cash on hand at $1.72T and people are thinking that it’s going to be a spending spree. Kind of sounds like people feeling richer than they are with their home equity. Truth is, if you borrow money because you feel that you need cash to protect yourself in case of a downturn…are you really going to just spend it and increase your balance sheet leverage? In the same report that states that cash on hand is $1.72T, it also shows that non-financial corporate sector debt has increased by $480 billion and now stands at $7.2T….Even more depressing is that Corporate debt net of cash has actually increased by about $200 billion since late 2008.
To simplify there has been no deleveraging in the corporate sector. Corporate debt net of cash stands at 37.6% of GDP, versus 36.7% in late 2008. It is also important to note that tangible assets have declined by 20% over the same period, furthering the dilemna.
So unless you though that corporate spending was going to prevent the economy from falling in 2008/2009…. your argument is even worse today. The FED’s attempts at spurring demand is also faltering. Every dollar is being used by consumers to deleverage, and rebuilt savings. The net effect is inflation/deflation combination in varying asset classes… notably food / housing.
Is it bad when the US cuts food stamps to fund public salaries? So let me get this straight… don’t cut taxes because people will just save it and the deficit is too high… but we can cut the food for the most desperate people so that states can balance their pensions for teachers unions? Prediction…private sector is going to riot at ridiculous public spending/salaries/pensions… which are much higher than what they get.