I've been arguing for some time that there is a fundamental problem at the core of our market system. That problem is that our big companies and corporations have no clue what to do. Far from being entrepreneurial, and far from taking the risk on investing in new goods and services, what they're actually doing is simply sitting on big piles of cash. And if they do seek opportunity for expansion it has, in the main, been to seek to capture state revenues for private benefit - which is the PFI model, the privatisation model, the outsourcing model and now the NHS privatisation model.
I've just noted some strong evince in support of this - albeit from the USA, and published in the Wall Street Journal in December, which said:
Corporate America's cash pile has hit its highest level in half a century.
Rather than pouring their money into building plants or hiring workers, nonfinancial companies in the U.S. were sitting on $1.93 trillion in cash and other liquid assets at the end of September, up from $1.8 trillion at the end of June, the Federal Reserve said Thursday. Cash accounted for 7.4% of the companies' total assets—the largest share since 1959.
The cash buildup shows the deep caution many companies feel about investing in expansion while the economic recovery remains painfully slow and high unemployment and battered household finances continue to limit consumers' ability to spend.
The buildup has a big downside for companies, which get little return on their money because interest rates are low, but it reflects the relatively few opportunities they see to deploy their cash more creatively.
Precisely.
And that's why all they can think to do is raid state activity to promote their own growth.
And that's also why growth is extraordinarily unlikely if we rely on private sector expansion - which is just not going to happen.
At a deeper level this is even more significant. Has technology run out of steam? Is there nothing new to really invest in? Or is it that people simply don't need more 'stuff'? And is it actually true that what they really want is what only the state can provide really well - such as education, healthcare, public services, care for the elderly, and more besides?
I think that wholly plausible. Of course there are those who will, dogmatically, disagree. But suppose I'm right - and suppose the corporations are right - there really is nothing to invest in? Then in that case the state is undoubtedly the future.
Ed Balls please note.
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‘Raiding state activity’ is an excellent way to put it, Richard, and of ocourse it precisely because the ConDems know that their policies in so many areas (from local governmentto forestry, but in the NHS in particular) will create so many opportunities for ‘raiding’ that they can be confident that there’ll be at least some private sector expansion. And lets not kid ourselves – they’ll milk that to death (as will their cheerleaders in the media) – to justify their policies.
But your right, of course, in terms of real growth – entrepreneurial activity – there’ll be zilch. And once all the opportunities to ‘raid’ have been removed – which if the ConDems are clever they’ll probably try to stretch out for a few years – the deceit of their policies will be exposed.
Yes, Ed Balls take note 😉
The state is never the future. Ask any Russian, East European or Chinaman who lived through the cultural revolution.
If the directors of public companies don’t know what to do with their cash they will be fired by the shareholders. There may be a lack of opportunities in developed countries, particularly where high taxes are likely to hamper growth, but there are always investment opportunities in other parts of the world.
@Alex
I will try to be as polite as possible
But this comment is asinine
If you think I’m daft enough to be recommending an Eastern European centralised state you deserve such description
But that does not deny that a significant role for the state – meeting the real needs of real people in the way the market clearly cannot is not key to our future economy
And that does not mean there will not be a strong market sector – but it may well be smaller than now – because what it supplies may well be of less significance with demographic change
@Richard Murphy
Your faith in shareholder control of companies is also quaint
When was the last director sacked by an AGM?
Respectfully – ;leave your fantasies behind when commenting here
@Richard Murphy
I think that was directed at me. Shareholders generally don’t wait until the next AGM. They speak to the non-exec directors who force the executive directors to resign if necessary. You want an example? Charles Allen, ITV: http://news.bbc.co.uk/1/hi/business/5255366.stm
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You’re absolutely right Richard. The market and the private sector have been shown not to work, and the future has to be the state. In Cuba, they have universal healthcare from cradle to grave, and a higher number of doctors per head than the UK. They also have far higher literacy rates than the UK, and infant mortality lower than the U.S. And they have shown that one can live perfectly happily with hardly any consumer goods. Furthermore, they achieve this without paying any outrageous bankers’ bonuses!
@Alex
Ah, I get it
In the quiet world in which the elite live nudge, nudge, wink, wink works because corporate governance doesn’t
But it’s only worked once
That makes it a great model of failure, doesn’t it?
Are you seriously using Cuba as a model of excellence? Hardly a nation of free people living perfectly happy lives.
If the relative size of the public and private sectors is to shift, which you want them to, in favour of the public sector, then the public sector will be doing far more but the private sector will be contributing far less tax to pay for it.
As for Jonny M’s contribution, it might as well have been planted by a right winger.
@Greg
I am certainly not saying Cuba is the model for an economy
@Terry Alderman
It is a complete myth that the private sector pays for the state
Our labour pays for the state – labour expended to meet need in the private and state sectors
It is an absolute myth that the state is built on the back of private sector profits
The economy as a whole is built ion the back of people’s work, and the use we make of natural resources
Financial capital is merely the temporary aggregation of the benefit of some of these – and a mere blip in that sense in the overall flow of activity
Firms need to sit on reserves, certainly in Europe.
Falling sales due to tax rises and sales in some tech falling significantly, now isn’t the time they can afford to invest in every idea they may have. Many need these reserves to keep themselves running through these bad times to hopefully emerge in the same form at the other side. My employer has put a new tech development on indefinite hold as the market for it is falling fast, and isn’t worth investment when other divisions need the money to keep afloat.
Most tech firms have already extended product sales life cycles from the usual 3 months upto 9 months in some cases. The public just can’t afford to spend money on things other than essentials for now, and are making do.
And the true impact of the tax rises and cuts isn’t even biting yet!
There are a few basic explanations to explain the mountain of cash.
(i) Bernanke has printed over $3 trillion of new “money” since 2008 (there is another $600 billion coming). That money has to end up somewhere, doesn’t it?
(ii) the corporate sector is on the receiving end of a Healthcare Bill whose financial impact nobody is remotely able to quantify. They are (overly) conservative as a result;
(iii) companies are holding excessive amounts of cash because they do not trust the financial sector’s ability to provide liquidity in the event of another downturn;
(iii) the corporate sector is generally concerned about being “crowded out” of financing markets, as neither Obama, nor Congress, nor state governors and legislatures seem to have any idea on how to start sorting federal and state finances.
There is no easy solution to any of this. But one can predict that tensions will appear between shareholders and managers/directors if at least a portion of that cash pile is not returned quickly. The anticipated volume of bshare buybacks is key factor supporting an S&P 500 at 1,300.