I have been told by a number of people pretty high up in major corps that they DO indeed plan to invest but not here - or if here, only in ways to get their production over there here at lower cost. Result - few jobs here.
This level of cash provides some hope for increased business investment. However I'm not so certain that companies "have relatively low debt" (I need to do some digging), and historically companies have cut their investment spending in response to economic slowdowns. (See graphs 3 and 4).
I agree - you hardly hear a peep about corporate debt right now. Is no news good news or just no news?
But then I wouldn't even assume they really have the cash either. If we learned anything from Enron its that there are some pretty clever accountants out there.
It is entirely possible some of that cash is 'monetized' assets - ie a result of transactions involving 'entities' that allow them to pull cash forward in exchange for downstream liabilities. In effect a kind of balance sheet carry trade. If the assets in the transaction are rock solid - probably no problem. But...
This is something I would think would be entirely possible in a low interest rate, high liquidity environment but would come to a crashing halt with increasing cost of money.
I certainly would have expected everyone would have learned from Enron and that more shenanigans wouldn't be possible. But then along came the back dating scandal. Doh!
Thanks for clearly explicating your position. I now realize that you have been stating similar themes in other posts (Slow learner!).
I sometimes think that studying charts like these are an advanced form of tea-leaf reading, but even I see these indicate our current situation may have historical and gloomy precedents.
Being a journalist (not in the financial/business press), I often think the media gets the story either wrong or puts way too much slant in the wrong direction. This is done not with ill intent but rather lack of knowledge and care.
Thanks again!
By the way, investment drops of 77% and 85% during the Great Depression are mind-boggling! I once talked with a friends grandfather about his experiences, and one of us asked why they didnt just go out and borrow money. He laughed and said something like: what banks?...and how no damn banks would loan you any money.
Basically I demonstrate that business and government spending would each have to rise 10% to make up for a modest (1%) drop in consumer spending. For business to do it alone spending would have to rise 20%.
I'm not holding my breath for business to pick up the consumer baton.
The AP writer could more appropriately have written that business debt service is fairly low. The level of debt is high, but there have been several periods of very high corporate debt issuance in recent years, much of which has been aimed at refinancing at lower rates. The result is that corporations are holding up very nicely under high debt levels (relative to GDP). There has also, of course, been a fairly hefty rise in debt associated with M&A, but again, that debt is held at rather low rates, holding debt service costs down.
I'm surprised that you didn't include any of these fed governor speeches in your post as references. The first two speeches lay out the situation. The third speech says we need to reduce U.S. demand.
Does the Fed want a recession or is it trapped by its thinking as relates to U.S. trade and current account deficits? Which priority is driving their thinking?
k harris, yes, the AP article would have been more accurate if it had discussed debt service. I noted that in my post: "With lower interest rates, business debt service is certainly below record levels (unlike household debt service that sets a new record every quarter)."
Business investment in what? Ramping up for sagging consumer demand (and its ripples down the supply chain)?
And to follow up on cm's post - where?
I have been told by a number of people pretty high up in major corps that they DO indeed plan to invest but not here - or if here, only in ways to get their production over there here at lower cost. Result - few jobs here.
This level of cash provides some hope for increased business investment. However I'm not so certain that companies "have relatively low debt" (I need to do some digging), and historically companies have cut their investment spending in response to economic slowdowns. (See graphs 3 and 4).
I agree - you hardly hear a peep about corporate debt right now. Is no news good news or just no news?
But then I wouldn't even assume they really have the cash either. If we learned anything from Enron its that there are some pretty clever accountants out there.
It is entirely possible some of that cash is 'monetized' assets - ie a result of transactions involving 'entities' that allow them to pull cash forward in exchange for downstream liabilities. In effect a kind of balance sheet carry trade. If the assets in the transaction are rock solid - probably no problem. But...
This is something I would think would be entirely possible in a low interest rate, high liquidity environment but would come to a crashing halt with increasing cost of money.
I certainly would have expected everyone would have learned from Enron and that more shenanigans wouldn't be possible. But then along came the back dating scandal. Doh!
Dear CR,
Thanks for clearly explicating your position. I now realize that you have been stating similar themes in other posts (Slow learner!).
I sometimes think that studying charts like these are an advanced form of tea-leaf reading, but even I see these indicate our current situation may have historical and gloomy precedents.
Being a journalist (not in the financial/business press), I often think the media gets the story either wrong or puts way too much slant in the wrong direction. This is done not with ill intent but rather lack of knowledge and care.
Thanks again!
By the way, investment drops of 77% and 85% during the Great Depression are mind-boggling! I once talked with a friends grandfather about his experiences, and one of us asked why they didnt just go out and borrow money. He laughed and said something like: what banks?...and how no damn banks would loan you any money.
Best regards
I actually addressed this in a post this morning as well. Digging Into GDP | Stock Market Beat
Basically I demonstrate that business and government spending would each have to rise 10% to make up for a modest (1%) drop in consumer spending. For business to do it alone spending would have to rise 20%.
I'm not holding my breath for business to pick up the consumer baton.
CR,
The AP writer could more appropriately have written that business debt service is fairly low. The level of debt is high, but there have been several periods of very high corporate debt issuance in recent years, much of which has been aimed at refinancing at lower rates. The result is that corporations are holding up very nicely under high debt levels (relative to GDP). There has also, of course, been a fairly hefty rise in debt associated with M&A, but again, that debt is held at rather low rates, holding debt service costs down.
CR,
I'm surprised that you didn't include any of these fed governor speeches in your post as references. The first two speeches lay out the situation. The third speech says we need to reduce U.S. demand.
Does the Fed want a recession or is it trapped by its thinking as relates to U.S. trade and current account deficits? Which priority is driving their thinking?
Remarks by Governor Donald L. Kohn
At the Forecasters Club of New York Luncheon, New York, New York
April 27, 2006
Business Capital Spending
http://federalreserve.gov/boarddocs/speeches/2006/20060427/default.htm
Remarks by Chairman Ben S. Bernanke
At the International Monetary Conference, Washington, D.C.
June 5, 2006
Panel Discussion: Comments on the Outlook for the U.S. Economy and Monetary Policy
http://federalreserve.gov/boarddocs/speeches/2006/20060605/default.htm
Remarks by Vice Chairman Donald L. Kohn
At the European Economics and Financial Centre Seminar, House of Commons, London, England
July 6, 2006
Reflections on Globalization and Policies
http://federalreserve.gov/boarddocs/speeches/2006/20060706/default.htm
MG, thanks for those links.
Best Wishes.
k harris, yes, the AP article would have been more accurate if it had discussed debt service. I noted that in my post: "With lower interest rates, business debt service is certainly below record levels (unlike household debt service that sets a new record every quarter)."
Best Wishes.
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