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Why are corporations sitting on their money?

At this morning's jobs discussion. I asked the panelists -- Labor Secretary Hilda Solis, AFL-CIO President Rich Trumka, Chamber of Commerce honcho Tom Donahue and Columbia University Professor Jeffrey Pfeffer --why businesses are sitting on $1.8 trillion in reserves. Clearly, they're worried about the near-term, and maybe long-term, economy, and are holding reserves to protect themselves. But why? Is it because there's not enough demand, and not enough expectation of demand growth, for their products? Fear of further dips and crises? Concern about government actions? Something else?

Donahue argued that it was concern over future taxes. Businesses look at the deficit, he says, and they know they're going to be taxed. What's odd about this argument is that the deficit hasn't changed in a way that would dramatically transform the long-term tax burden. The major deficit issue is a long-term imbalance between revenues and spending, not the stimulus over the past two years. To put that in terms of numbers, a mid-range projection would put debt in 2022 at 21.5 trillion. The stimulus was about 3.5 percent of that. If businesses are worried about future taxation now, it means they were ignoring the numbers three years ago. Which is possible, of course. But future taxation is not an invention of the economic crisis.

Pressed on the subject, Donahue allowed that fears of further market turmoil and insufficient consumer demand were also players in business decisions. At this point, Pfeffer offered a useful addition: Businesses are herd animals, he said. They tend to spend all at once and hoard all at once. So the fact that many of them are hoarding now is convincing the rest of them to hoard now, and the question is how you break that cycle so a few major players step out and invest and make their competitors feel like they'd be missing out if they didn't do the same. But that sort of change requires some positive shock -- great jobs data, say -- and it's not clear where that'll come from.

By Ezra Klein  |  July 9, 2010; 12:50 PM ET
 
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Comments

Why are corporations sitting on their money?

To keep their nest eggs warm so that they'll hatch later.

Posted by: ostap666 | July 9, 2010 12:58 PM | Report abuse

Risk adjusted return on investment. The buseness leader examines the 6 month, 1 year, 5 year and 10 year investment horizons to identify opportunities that will produce returns in excess of what can be earned by leaving assets in money market funds. Few, if any. Next the CFO discounts those projected returns to reflect inflation and risk. At this point, the board of directors decides that cash seems likely to be the best investment.

Seriously, if you had $10,000,000 to invest where would you put the money for those time periods and what sort of return would you expect? It keeps coming back to broad based mutual funds for individuals and cash for corporations. There simply is not a lot of opportunity out there right now.

Posted by: WoodbridgeVa1 | July 9, 2010 1:12 PM | Report abuse

Donahue argued that it was concern over future taxes. Businesses look at the deficit, he says, and they know they're going to be taxed


-----


Ezra wait so Donahue said he was concerned about future taxes (that I agree with 100%) but did HE say concerns about the deficit or was that you? I'm thinking that was you. I don't think he'd have said that I think that's maybe you moving his thought along.

The Dems CAN'T be the party FOR Main Street and the party of Less or even the SAME taxes. Everyone knows taxes are going up and have ALREADY gone up. Taxes in healthcare, taxes in Cap and Trade, an increase to the capital gains taxes, dividends, financial transaction taxes etc.

Just because taxes were TOO LOW before doesn't mean that businesses will just shrug and say "Oh, you got me . . . let me get my checkbook".

They see the deficit commission on the horizon and while businesses would likely laud an increase to the SS retirement age they know that with that they'll have to relent to higher taxes.

Posted by: visionbrkr | July 9, 2010 1:15 PM | Report abuse

This idea that business is not expanding because they are afraid of some possible future event is undermined by the very belief system these people try to sell to us.
Conservative market theory (aka supply and demand) states that if there is a void in the market that can be filled at a profit, someone will step in to fill that void.
Therefore, under this theory, if company A says they are not going to expand or hire, despite a market need to expand or hire, simply because they are afraid of some hypothetical future event, company B will step into this void and have a leg up on their competitor.
Nay, there is no demand in this country for more products or services, and thus the supply-siders have to invent a whole bunch of nonsensical things to explain this away. All the tax cuts for corporations n the world won't encourage a bunch of under-employed and over-leveraged Americans to buy more pogs.

Posted by: flounder2 | July 9, 2010 1:21 PM | Report abuse

They are trying to blackmail Obama on taxes; Donahue was right. But so was the other guy--they are herd animals and are all waiting for signs that things are getting bettter, in other words, waiting for the other guy.

Posted by: Mimikatz | July 9, 2010 1:21 PM | Report abuse

@vb: taxes in Cap and Trade, an increase to the capital gains taxes, dividends, financial transaction taxes etc.

Cap and trade hasn't passed, there is no financial transactions tax right now (mores the pity), and allowing the Bush tax cuts to expire should have been anticipated, since ITS IN THE LAW THAT THEY SUNSET. Not sure what you mean by taxes in health care...

Its always easy to cut taxes. Its like eating dessert first. Raising revenues is like exercising those calories off. Its always easier to do the former than the latter and so most people like to eat dessert and don't like exercising it off.

Posted by: srw3 | July 9, 2010 1:24 PM | Report abuse

The explanation that this is provision against future taxation doesn't really make sense.

Taxation is a normal cost of doing business - any solvent business should be able to pay its taxes out of the proceeds of its activities. This is because tax charges are triggered either by specific transactions that generate cash (e.g. sales, sales of capital goods) or are recurring fixed costs (such as property taxes) and analogous to rents. Saving up is never going to convert a business that costs more to run that it takes in into a business that covers its own costs, except by converting the business into an investment business.

Posted by: albamus | July 9, 2010 1:32 PM | Report abuse

As a business person, I see good reasons to sit on cash for the next few years, or even the remainder of the decade...

Posted by: mckibbinusa | July 9, 2010 1:49 PM | Report abuse

Ezra,
I am supprised that you had to ask why. It seems pretty obvious to me. Obama and his liberal cheerleaders (including you) are advocating running up the national debt now to double and tripple historic levels. At some point Obama, with his liberal backup singers, will announce that the deficit is a big problem and somebody is going to have to pay for it. If any of these businesses invest now, to increase their profits later, they will have a big target on their backs. When the oil companies were making decent profits from their earlier investments, liberals were screaming for windfall profits taxes and villifying them for being successful. Who wants to grow their companies now in this enviroment? It is in companies best interest to wait until the Republicans take control of congress. If that happens, expect the company spending floodgates to open.

Posted by: cummije5 | July 9, 2010 1:50 PM | Report abuse

This taxation argument makes my blood boil. Albamus is right. But, most of the taxes you listed were state taxes, property and sales. Federal taxes are taxes on PROFIT. If someone made a finanical decision based on a 5% increase in tax rates, and there was profit out there to be made, that person is a moron. There is a lack of demand worldwide. If there was profit out there to be made, businesses would find it and invest in it.

The chamber of commerce people are the most intellectually disingenous characters out there. They come up with this tax motive steaming pile and shovel it out the door. The right wing grabs a hold of it and spreads is as gospel. GRRRRRR. It is so frustrating.

Posted by: nccpa1 | July 9, 2010 1:54 PM | Report abuse

Ezra, this post implies that Pfeffer's explanation is somehow a third explanation. It isn't. Recessions are caused in part by herd behavior on the part of businesses and consumers--businesses don't want to invest if others aren't investing because one business's employee compensation cost is another's revenue (because those employees buy stuff), and consumers don't want to buy because they're concerned about their job security. In other words, Pfeffer's explanation is pretty much exactly an economic one: concern about future demand.

Posted by: ethanpollack | July 9, 2010 1:55 PM | Report abuse

srw3,

while you're correct that cap and trade hasn't passed the fact that it MAY is more than enough to stall a hesitant business owner in a GOOD economy much less this one.

Again anticipation of the end of the Bush Tax cuts has no bearing. You're taking what taxes are like right now at one point in time to another and its WORSE once the tax cuts expire. That doesn't along with everything else breed much confidence.


You're not trying to say there weren't taxes in healthcare are you?

http://www.nj.com/business/index.ssf/2010/03/health_care_plan_has_hearty_li.html

Posted by: visionbrkr | July 9, 2010 2:06 PM | Report abuse

"Jeffrey Pfeffer --why businesses are sitting on $1.8 trillion in reserves. Clearly, they're worried about the near-term, and maybe long-term, economy, and are holding reserves to protect themselves. But why?"

There is a lot of uncertainty right now for a lot of reasons. In addition, the federal government has been creating a lot of safe assets recently. The $800 billion stimulus spending isn't coming from nowhere. The government borrowed to pay for it. In order to borrow the government had to issue $800 billion in treasury notes and securities. Some of these government liabilities are now assets for corporations.

Given all of the uncertainty, corporations were happy to lend to the government and get a guaranteed return as they continue to evaluate economic conditions.

Posted by: justin84 | July 9, 2010 2:06 PM | Report abuse

CEOs I have spoken with tell me that they are looking for a reason to spend, but that reason does not have to be a clear cut economic growth signal. It could be a change to the tax code, for example, allowing accelarated depreciation or even full immediate expensing of capital investments. Congress dipped its toe in the water on this idea in the stimulus bill.

Posted by: horacemann | July 9, 2010 2:09 PM | Report abuse

Donahue answered the way he did because it is his job to state his talking points.

His job is to lobby for a favorable environment for business which means lower taxes, higher corporate subsidies, less regulation, etc.

Who knows what his actual beliefs are but you are not talking to the person, you're talking to the persona he is paid to be. You can't really have productive conversations with people who are paid to argue specific positions.

Posted by: BHeffernan1 | July 9, 2010 2:24 PM | Report abuse

For about the millionth time, corporations are sitting on their money because business investment isn't necessary, i.e. there is no opportunity for it. Since this is a recession, capacity utilization is low and so we are in oversupply. We are not having a supply failure, we are having a demand failure. For example the recent Pew poll showed that 50% of U.S. household are spending less than normal. What would you expect? They don't have enough money, although the productive capacity is sitting there. The only way that business investment could get us out of this is if most people were employed in making capital goods. They aren't. Most people get paychecks and salaries by the making and selling of consumer goods and services. We need consumer demand. --That someone wouldn't give this preceding answer, and instead blabber on about taxes just like a lobbyist, without the audience laughing their heads off, shows that the U.S. is in a parlous intellectual condition.

Posted by: Lee_A_Arnold | July 9, 2010 2:25 PM | Report abuse

I think Donahue accidentally made the argument for more regulation.

One of the easiest ways to take a bite out of future unceartainty is to increase regulation of wall street. Investment would increase because there would be less worry about the future.

Posted by: nccpa1 | July 9, 2010 2:29 PM | Report abuse

Does "herd behavior" = "animal spirits" (or lack thereof)? I've wondered--the over-simplified Keynesian cure is fiscal expansion. When fiscal means work, is it because of rational economics at work, or simply a revival of animal spirits because someone has a solution? Is it possible that because we've lost faith in government that fiscal remedies don't work as well as perhaps they did in the past? Is economics is really 90 percent animal spirits/herd behavior?

Posted by: bharshaw | July 9, 2010 2:34 PM | Report abuse

"This taxation argument makes my blood boil. Albamus is right. But, most of the taxes you listed were state taxes, property and sales. Federal taxes are taxes on PROFIT. If someone made a finanical decision based on a 5% increase in tax rates, and there was profit out there to be made, that person is a moron."

Calm down. No need for your blood to boil - you can rationally turn down profitable investment opportunities.

http://en.wikipedia.org/wiki/Capital_budgeting

Open an excel spreadsheet, and put in these numbers in a row: -500, 150, 150, 150, 150. This is a $500 investment and your profits increase by $150 for the next four years. Sum these up, and you get $100 in total profit.

Do the same on the next row, but take out 5% from the $150 cash flows, so you're at $142.50. Sum the cash flows and you're at $70. Clearly, someone would be a moron to no longer take on the project, per your analysis, because there is still profit to be made.

However, next to the first group of cash flows enter =IRR() and select all of the cash flow cells in the parenthesis. You should get 7.7%. Then do the same for the second group of cash flows - you'll get 5.5%.

So either way you slice it, the 5% tax hike the internal rate of return by 30%.

Let us say that this firm has a weighted average cost of capital of 6.5%. Before the tax increase, it might well accept the project, because the expected return exceeds the cost of financing the investment. However, after the tax is put into place the return falls below the cost of capital and the project does not go forward.

This was a simplified example, but the point should be clear. You could complicate it, adding uncertainty about revenues, tax rates, adjusting for operational risk, etc. Including all that, you might not take on a project even when expected returns exceed costs, because the uncertainty of the cash flows is too high. Treasuries aren't providing a great return right now, but there is little risk and the supply of Treasuries has soared recently, providing higher yields than would otherwise be the case.

You can hold off on making a profitable investment and not be a moron, because you have to adjust for risk and the opportunity cost of capital.

Posted by: justin84 | July 9, 2010 2:40 PM | Report abuse

--"I asked the panelists -- Labor Secretary Hilda Solis, AFL-CIO President Rich Trumka, Chamber of Commerce honcho Tom Donahue and Columbia University Professor Jeffrey Pfeffer"--

Asking those people about why business acts like it does would be like asking a vegan why meat eaters eat meat. They haven't a clue. You might as well poll children on what adults are about.

Typical Klein nonsense (in his usual propagandish vein.)

Posted by: msoja | July 9, 2010 2:44 PM | Report abuse

And not just the anticipation of taxes, but of business killing regulation coming down the pike. Verizon CEO said that just this week. Now quick, get the oppo research started on him.

Posted by: truck1 | July 9, 2010 2:46 PM | Report abuse

This reminds me of the conversation had during health care reform about why the business community clings so tightly to our system of employer-sponsored health insurance. Just as dumping that system would've been beneficial for their bottom line, policies stimulating aggregate demand would be helpful for them now. Yet groups like the Chamber and the NFIB crow about deficits.

Businessmen have outsourced their political thinking to lobbyist groups which are dominated by right-wing orthodoxy.

Posted by: MattMilholland | July 9, 2010 2:55 PM | Report abuse

@justin84:

What possible investment can you make that doesn't give you a tax deduction? Let's say you buy another assets or you hire an additional employee. Your argument falls apart when you actually apply it to the real world. I appreciate your utopian view of a $500 cash outflow not being tied to the profit in any way.

Let's say it was a $500 asset you purchased and you can expense it over the next four years or $125 each years. Your profit per year has just been reduced to $25. The additional tax is 1.25. So, now the difference is between $100 in actual profit or $95. What percentage is that again? Hmmmm. I am a business and I am making a decision over 5%, like I originally said.

Put that in your spreadsheet.

Posted by: nccpa1 | July 9, 2010 3:10 PM | Report abuse

@mckibbinusa and cummije5:

I appreciate your honesty in noting that this is a capital strike by the plutocrats that control the large corporations. Its not that they can't make a profit, its that they judge the profit to be too small right now.

I hope you are as solicitous to labor when they strike because they think that their labor is not bringing in the returns that they feel they deserve.

I would also note your admission that the plutocrats are aiding and abetting the party of NO (their party of choice, the repiglicans), by starving the economy and driving it into the ground so that the party in power is blamed. Then when the republicans get in, they will open the floodgates and expand...

Posted by: srw3 | July 9, 2010 3:12 PM | Report abuse

@flounder2:
"Conservative market theory (aka supply and demand) states that if there is a void in the market that can be filled at a profit, someone will step in to fill that void.
Therefore, under this theory, if company A says they are not going to expand or hire, despite a market need to expand or hire, simply because they are afraid of some hypothetical future event, company B will step into this void and have a leg up on their competitor."
That's not conservative market theory at all, that's a liberal, or rational model.
In conservative market theory, the Great Capitalists will only deign to sprinkle jobs and progress on the crude masses if properly fellated by the political establishment and/or said masses. The availability of mass profits are entirely irrelevant in this model; commonly, a dump truck full of cash could be parked on a Great Capitalist's front lawn, and when the Great Capitalist pokes his nose out of his door and sniffs, if he catches a whiff of non-adoration* in the air, he will be spooked, slamming his door on the populous and hibernating for a minimum of six more weeks.
Clearly our current problem, given an understanding of Conservative (or 'Groundhog') Economics, is that some combination of healthcare reform and President Obama saying mean things about certain CEOs has the Great Western Capitalists spooked.
*Health benefits for poor people also smell very scary.

Posted by: eggnogfool | July 9, 2010 3:17 PM | Report abuse

Anyway, I'd submit two reasons for the cash hoarding:

(1) With inflation negligible and falling, cash is great right now.

(2) Cap and Trade! Businesses will start investing a lot more if and when climate change/carbon tax/cap and trade legislation fails.

Or when it passes. But as long as we have a Schroedinger national energy policy, it makes no sense to invest in anything that has a good chance of being flushed down the toilet by a policy change or non-change a year or two down the road.

Posted by: eggnogfool | July 9, 2010 3:26 PM | Report abuse

--"In conservative market theory, the Great Capitalists will only deign to sprinkle jobs and progress on the crude masses if properly fellated by the political establishment and/or said masses."--

You're mistaking Klein's "panel" for "Great Capitalists". Holding up that crew as any authority on what "Great Capitalists" would do or not do is ridiculous. But Klein wants you to believe that such clowns speak for "Great Capitalists" and if that's what you choose to believe, so much for it, but it looks silly.

Ask a panel of real capitalists why they're not spending, and I'm sure you'd get a great variety of specific answers somewhat more boring than the political cliches that are Klein's meat and potatoes. Take an honest look at the entire economy and you'll find sectors of businesses prospering and expanding, and others, failing and collapsing. It makes no sense to go building houses when there's a glut of the things.

Posted by: msoja | July 9, 2010 3:33 PM | Report abuse

Ezra,

The better question to ask would have been "what is holding businesses back from spending?" The question "why are businesses sitting on... ?" is predicated upon the idea that businesses have more control than they do.

There are significant demand side issues here, just read Krugman for details, and they are the bulk of the problem.

The other, most salient, problem is the recent, and ongoing crisis of credit. (LIBOR is still pretty low...) That is to say there isn't a pile of 1.8 trillion... or even a dozen smaller piles of money... sitting around somewhere waiting to be put to use. There is some 1.8 trillion in capital that needs to be converted to liquidity before it can be put to use. Banks have become stringent in the extreme with respect to lending whereas lending is the preferred method of liquidity.

Kinda like the Twilight Zone episode where Burgess Meredith is the last man on earth, with (therefore) all the time in the world read all of the books in the world, only to break his reading glasses.

Between the demand issues and the credit crunch, an ongoing, and self-re-inforcing austerity loop has caught business in a vice.

Posted by: swedock | July 9, 2010 3:43 PM | Report abuse

Did Donahue slam his fist on the table and scream "Show me the Money!"?

He is a disgusting human being, from what I can tell.

Posted by: rat-raceparent | July 9, 2010 3:48 PM | Report abuse

visionbrkr,

Businesses don't want to have their ranks full of 68 year olds waiting on a pension, yelling at the kids to keep it down. That's a recipe for disaster!

They are just presenting false choices, so their goodies aren't taken away.

Posted by: rat-raceparent | July 9, 2010 3:53 PM | Report abuse

I would augment justin84's capital budgeting explanation by adding (for people interested in corporate finance):

holding off on capital investments provides learning options (a form of real option). the greater the uncertainity, the greater the violitility, and thus the greater the value of the real options.

still the demand side seems more compelling here than political environment

Posted by: stantheman21 | July 9, 2010 3:54 PM | Report abuse


Not sure what you mean by taxes in health care...

Posted by: srw3 | July 9, 2010 1:24 PM | Report abuse


Oh and I missed this one. Even the IRS' affilliate says its BOGUS.


http://money.cnn.com/2010/07/09/smallbusiness/irs_1099_flood/index.htm?source=cnn_bin&hpt=Sbin


and srw3 as far as your question if people should be OK with strikes because labor's not getting what they want, sure go ahead and strike. Better yet go out and start your own business if you think you can do it better. That's what I did. I readily admit that its not possible in every industry but many it is, but why should labor have to task themselves when you've got goodies like tenure, CBA's, nice fat pensions etc.

Posted by: visionbrkr | July 9, 2010 4:35 PM | Report abuse

nccpa1,

"Let's say it was a $500 asset you purchased and you can expense it over the next four years or $125 each years. Your profit per year has just been reduced to $25. The additional tax is 1.25. So, now the difference is between $100 in actual profit or $95. What percentage is that again? Hmmmm. I am a business and I am making a decision over 5%, like I originally said.

Put that in your spreadsheet."

Wow. Way to miss the point. Let me put it into bullet points for you:

- The disincentive effect is felt between the difference between expected return and the cost of capital, not between expected return and zero.
- Cash flow uncertainty matters.
- The prospect of tax hikes and regulatory change add to cash flow uncertainty.

Thanks for reminding me about the real world, but your introduction of depreciation/accrual accounting doesn't really matter which I why I didn't bother complicating the picture. I used cash flows of -$500, $150, $150, $150, $150. You used $25, $25, $25, $25. Okay then. We agree the cash profits are $100, and taxes reduce these to $95. The 'real world' stuff is in those bullet points above.

You don't invest in everything that might be profitable, taxes or not. The initial $500 isn't free. So the choice isn't between $100 or $95, it might be between $15 or $10. Hmmm... that's 33%! And if that $10 is less certain than the $15, then the disincentive is more than 33% - and the $15 is already uncertain because we cannot be sure what the cash flows will actually be.

On top of this, a real person has to go and propose the project and be responsible for its success or failure. Provided this person has other things to do that make them appear useful, he or she might not want to run the risk of a spectacular failure given the expected returns. There's a lot of look stupid factor right now - very easy to say "I told you so" if things go south. So you have reputational capital on the line as well as the firms capital.

The economic environment matters, and that is the reason for much of the decline in investment. But it matters in more than one way. There is the obvious "we don't need to expand right now" way. However, it also reduces the IRR of potential investments, all else being equal. In conjuction with tight credit, that makes the gap between IRR and cost of funds substantially tighter than normal (either via wider credit spreads or a greater proportion of equity funding). This tighter spread magnifies the impact of higher taxes.

Finally, as stantheman21 said, leaving cash on the sidelines has option value, and that option value is higher in downturns than expansions.

Posted by: justin84 | July 9, 2010 5:18 PM | Report abuse

@vb: so you agree that the business community is in fact engaging in a capital strike which is analogous to a labor strike and that both are equally justified?

Posted by: srw3 | July 9, 2010 5:38 PM | Report abuse

"To put that in terms of numbers, a mid-range projection would put debt in 2022 at 21.5 trillion. The stimulus was about 3.5 percent of that. If businesses are worried about future taxation now, it means they were ignoring the numbers three years ago."

I have the FY2008 mid-session review.

http://www.gpoaccess.gov/usbudget/fy08/pdf/08msr.pdf

In Table S-1, it doesn't go past 2012, but in 2012 the projections are for a small surplus of $33 billion, with a presumed trend towards larger surpluses. This doesn't seem to assume the expiration of the Bush tax cuts as revenues as a % of GDP don't jump up. Clearly, we'd expect the surpluses to turn to deficits a few years later as Social Security and Medicare spending ramps up, but I think it is entirely conceivable that anyone who looked at the FY2008 MSR would have expected the debt to be in the $5-$7 trillion context.

You had people in the summer of 2007 forecasting surpluses as early as Fall 2008 based on the recent trends.

http://www.optimist123.com/optimist/2007/07/deficit-watch-j.html

Posted by: justin84 | July 9, 2010 6:15 PM | Report abuse

--"so you agree that the business community is in fact engaging in a capital strike which is analogous to a labor strike and that both are equally justified?"--

Why would anyone have a problem with people withholding anything that is their own property?

If you're not free to withhold your own labor, you're a slave. If you're not free to dispose or not dispose of your own hard assets as you see fit, likewise, they aren't really yours.

Of course, collectivists and propagandists like Klein work very hard to blur the lines of ownership, because they spend a lot of time coveting that which does not belong to them.

Posted by: msoja | July 9, 2010 6:50 PM | Report abuse

Not everyone believes Pelosi's interpretation of CBO...or more correctly not everyone believes that Pelosi's tunnel-vision view of certain CBO statements do not tell the whole picture.

Healthcare costs WILL continue to spiral out of control as Obamacare DOES NOTHING to fix the fundamental problem, decoupling the payer of healthcare services from the beneficiary---BUT what it does do is put the Government(i.e. Taxpayer) on the hook for 40 million new people.

Any corporation who cannot understand that it means HIGHER TAXES FOR THE NEXT 20+ years wouldn't be a very smart corporation in the first place.

Posted by: FastEddieO007 | July 9, 2010 8:25 PM | Report abuse

@vb: so you agree that the business community is in fact engaging in a capital strike which is analogous to a labor strike and that both are equally justified?

Posted by: srw3 | July 9, 2010 5:38 PM | Report abuse

Yes. And I agree with both entities rights to do it. The only issue that I have is that when labor strikes we hear of "scabs" and we see the "ugly" side of labor that never gets talked about around here.

Posted by: visionbrkr | July 9, 2010 10:18 PM | Report abuse

In developed countries worldwide, corporations are substantially increasing their holdings of cash assets. Pundits, regulators and governments are asking “Why?”

Those asking the question posit that this hoarding is slowing the recovery and destroying jobs. As a result, more fiscal stimulus, deficit spending, social programs and regulation are required. Thus, corporate cash hoarding is the cause and a growing public sector is the effect.

Treasury Strategies’ work with the financial officers of companies provides a glimpse at the answer. We believe that quite the opposite is true.

Corporate liquidity is its most basic form is the sum of cash assets plus borrowing capacity. The amount of liquidity a prudently managed company requires is a function of its working capital needs, a cushion for the risk of the enterprise plus anticipated capital investment.

To state this as an equation, corporate cash requirements are the sum of working capital needs, a risk cushion and capital investment minus borrowing capacity.

Our corporate treasury clients tell exactly what’s happening:

The requirement for liquidity has increased.

1) regulatory and economic uncertainty increase the required risk cushion

2) limitations on hedges and derivatives increase the required risk cushion

3) collateral requirement on derivatives increase required cash assets

4) economic slowdown is increasing investment in receivables and working capital

5) while capex has declined, it does not offset the above increases

On the flip slide, corporate treasurers believe their access to credit is becoming more limited.

1) public sector borrowing will crowd out private sector borrowers

2) regulation will lead to bank consolidation thereby limiting borrowing options

3) capital requirements will make lending to all but the most creditworthy companies less attractive to banks

4) restrictions on money funds will limit their appetite for commercial paper.

So the answer to the question of why companies are hoarding is both simple and rational. Their liquidity needs have grown as a result of many of the ‘solutions’ to the crisis. Yet they believe their access to credit will become restricted, also as a result of many of the ‘solutions’ to the crisis. Thus, their only prudent alternative to balance the equation and achieve a new equilibrium is to increase their level of cash assets.

www.TreasuryStrategies.com

Posted by: TonyCarfang_TreasuryStrategiesInc | July 9, 2010 10:19 PM | Report abuse

Healthcare costs WILL continue to spiral out of control as Obamacare DOES NOTHING to fix the fundamental problem, decoupling the payer of healthcare services from the beneficiary.

If this is true, how is it that the rest of the developed world somehow is able to run single payer and other universal health care systems where the same separation exists and yet can do it for 20-50% less for comparable outcomes?

Posted by: srw3 | July 10, 2010 1:05 AM | Report abuse

The same companies were sitting on mountains of cash for years before the crash too so the current explanations are just convenient rationals for demanding lower corporate taxes and less regulation (as if that didn't just bite us hard). Why were they sitting on all that cash then? The problem is the corporate system has gotten so good at squeezing workers, and the surplus of workers (with all the new Chinese moving from rural to town), and our own abandonment of New Deal policies, leaves us with no middle-class to afford to buy anything. The proper cycle of capital is constipated with all the money stuck at the top. New Deal like policies would do them a favor and force the creation of a middle class that could buy things and all that money would start being invested in further production like it should.

Posted by: TomCantlon | July 10, 2010 2:20 AM | Report abuse

@vb: I don't condone union violence. Union violence, which I acknowledge does happen on occasion and that I deplore, just like union corruption, pales in comparison to the hired goons and pinkertons that terrorized workers for decades or the collusion between management of different companies on wages, benefits, and other workers rights. I do believe that labor law should be strengthened at least to the levels that Canada has and enforced as rigorously as other statues and that an actual functioning NLRB and meaningful binding arbitration would level the playing field so that the owners don't hold all the advantages when collective bargaining happens. Looking over labor history, who has killed more workers, intra worker conflict (union members against scabs) or management hired gun wielding goons or "law enforcement" working on behalf of the owners. I don't recall many episodes of the police protecting workers from management hired "security forces".

Posted by: srw3 | July 10, 2010 9:53 AM | Report abuse

tcts:1) public sector borrowing will crowd out private sector borrowers

2) regulation will lead to bank consolidation thereby limiting borrowing options.

1) I can believe that this was a problem in the past, but there is no evidence of this happening right now or that it will happen in the near future. When the discount window gets over 2%, we can start pulling back on govt borrowing. Right now, there is basically free cash and businesses are not using it, so the govt isn't driving up interest rates or crowding out private investors.

2) Well the alternative of looser regulation has led to the current credit debacle and financial meltdown, so I don't think there is a realistic alternative to more regulation and capital requirements. Did you miss the financial collapse? Without better (actually more automatic triggers instead of so much discretion to regulators) regulations and more robust enforcement, what will stop another crisis from occurring?

Posted by: srw3 | July 10, 2010 10:09 AM | Report abuse

--"[T]he 'ugly' side of labor that never gets talked about around here."--

The bigger 'ugly' side is: The Department of Labor.

Why are unions granted protections and privileges under the law available to no other individual or entity?

I'm fully in favor of people associating and organizing with whom they like, and going on strike against a business if that's what their "organization" decides, but I'm equally sure that the entity against which they bring their strike should be entirely free to ignore, dismiss, hire replacements, or acquiesce to the demands as *they* see fit. The one-sided intrusion of government into the business-union relationship is a large part of the dark abomination slowly undermining this country.

Posted by: msoja | July 10, 2010 11:11 AM | Report abuse

@mjsoja: Why are unions granted protections and privileges under the law available to no other individual or entity?

I guess you missed the last 150 years of labor history and why unions got the very minimal protections against the depredations of owners and management. I know you believe in the golden rule, ie those who have the gold make the rules. We all saw how adherence to the owners have all the power led to abuse, company housing and stores resulting in what amounts to debt peonage, child labor, unsafe working conditions, indifference to injuries in the workplace, unsafe handling of hazardous chemicals, etc. The US has the weakest labor laws and the lowest union participation in the industrialized world. As a society, we decided that owners shouldn't hold all the cards in employment relations. Unions are the best way for workers to protect themselves from employers like Walmart. Note the frequent labor law violations, unpaid overtime, unsafe or harrassing working conditions, scheduling to avoid having to hire full time employees, etc.

Posted by: srw3 | July 10, 2010 2:10 PM | Report abuse

--"Unions are the best way for workers to protect themselves from employers like Walmart."--

LOL. You see what you just did there shows what a nutter you are.

People don't want the authoritarian, self-serving incompetence that is the modern labor movement, so people, as in Wal-Mart employees, don't organize. People want jobs, and not a lot of fol de rol attached to them.

And you still didn't tell me why union workers are granted special privileges under a Constitution founded on the principle that all men are created equal. In a free country, special provisions cut out for one class of people is a disgrace.

Posted by: msoja | July 10, 2010 7:15 PM | Report abuse

@msoja:People don't want the authoritarian, self-serving incompetence that is the modern labor movement, so people, as in Wal-Mart employees, don't organize.

I guess you don't get out much. Walmart workers in the US and canada have tried repeatedly to form unions. Walmart does everything possible legal or not to keep unions out. They close stores, they threaten and fire pro union employees, they force employees to attend anti union seminars, etc. Walmart has been fined millions in labor law violations to keep the unions out. Again, owners are actively preventing workers from organizing.

Posted by: srw3 | July 11, 2010 3:20 AM | Report abuse

--"[O]wners are actively preventing workers from organizing."--

Yer lying or mistaken. Owners are actively *discouraging* workers from forming unions, but the law does not permit them to *prevent* such. If enough Wal-Mart workers wanted to unionize, they would unionize.

But you still didn't answer the question about the special dispensation granted an arbitrary class in a country formed specifically to prohibit such special dispensations.

Posted by: msoja | July 11, 2010 12:12 PM | Report abuse

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