The FT has two articles today that suggest that the penny is dropping at there that cash flow is king, and that the pile of corporate debt being taken on by business as a result of the coronavirus pandemic may cause massive business problems for a long time to come.
As the Lex column noted, commenting on the UK situation:
A return to full UK lockdown aims to save lives. The inevitable consequence will be an increase in business collapses. Britain's smaller businesses are most exposed. Many have only survived thanks to government support. A new £4.6bn support package announced by chancellor Rishi Sunak will do little to stem casualties.
They added:
The new measures are a drop in the ocean compared with the £200bn of aid that has already been taken up by UK business. Government-backed loans and VAT deferrals are increasingly at risk of never being repaid. Businesses able to continue will carry burdens that stifle investment, slowing recovery.
I have been saying this since last March, when it was obvious that this risk existed. Finally, they have noticed.
The same issue is being noted in the USA, apparently. Another article notes that:
While stimulus measures and borrowed money could help keep companies stay afloat, it would not secure their futures if they struggled to return to profitability, [debt specialist Howard] Marks said. “Even borrowers that eventually are profitable may find themselves over-levered after the pandemic and struggle to service their debt,” he said.
He's right, and he was talking about the large corporate sector: it makes no difference because loans that fund losses crush the capacity to invest. This is why I have for so long during this crisis been calling for capital investment and not loan provision.
And what's the outcome? Try this from the World Bank, also noted in the FT this afternoon:
Even before coronavirus hit, global growth had been expected to slow over the next decade, due to under-investment and shrinking labour forces in advanced economies. The pandemic is likely to worsen this slowdown, doing lasting damage to health, education and corporate balance sheets, the World Bank said.
It added:
Without comprehensive reforms “if history is any guide, the global economy is heading for a decade of growth disappointments”, it said.
It's possible that they might be over-optimistic.
The world is awash with money, but none of its owners want to assume any risk, from government onwards. Such is the nature of modern capitalism: everyone else has to assume the downside bar the capitalist. The poverty within that thinking is coming home to roost.
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Not entirely true.. firstly owning medium or long term Government debt assumes massive risk where from current prices you are 99.9% certain to lose a lot of money in real terms and probably nominal too… also at the private equity level there has been phenomenal new investment. I am finding companies are choosing to stay private much much longer and grow away from public markets.
I might call that a worm’s eye view: the ultra micro perspective on a macro concern
@ Andrew
1. I do not see the relevance of the condition of state debt, not even mentioned in the OP as far as I can find. Moreover there seems to be no shortage of takers for it.
2. The wonderful activites of private equity are an example to us all – or would be if you gave us some instances. For the most part, they seem to be vultures emptying out the real resources of the companies they buy (I am aware of a few exceptions).
And this at a time when it should be blindingly obvious that massive investment is needed to tackle climate change. If it won’t come from the owners of capital then government will need step in and the owners of capital will find themselves contributing in less voluntary ways
Companies active in the area of renewables or indeed energy efficiency (e.g. Rockwool) are for the most part – profitable and have very very low debt. Companies such as Orsted have little problem riaising money (ref Euro500 m or was it Euro1 billion bond in 2020). The problem is governments: who continue to stand as gate keepers with respect to RES projects coupled to (so far) an unwillingness to reform energy markets for a renewable future. That’s the problem. Richard is correct, the world is awash with money looking for a home and this is reflected in stupid asset (share) valuations. If there was more economic (i.e. energy efficiency and renewables) activity, there would be less of a problem.
May I add another word beginning with ‘R’?
‘Responsibility’.
Now when did capitalism (Government and market) stop thinking about that?
And obviously no one has worked out how people without jobs (due to A.I. development) can have money to spend and keep the next economic epoch going.
“The world is awash with money, but none of its owners want to assume any risk, from government onwards. Such is the nature of modern capitalism: everyone else has to assume the downside bar the capitalist. The poverty within that thinking is coming home to roost.”
This is fantastic and philosophical stuff.
And when you know that government, which you elect – and ought, at least, to be accountable to you, creates that money, you ought also to know where you are – or even how we are being deceived…
Risk aversion was already a big problem before the pandemic. Much of the quantitative easing splurged after the 2008 financial crisis went into share buybacks. This reflects not only the short term greed of executives, but also a poverty of ideas for real innovation and growth in their markets.
Risk aversion in capital markets may reflect a number of long term trends:
1) Low growth expectations in G7 economies (struggling to reach 2% even without crises, vs 5-7% in fast developing economies.
2) Growing dominance of pension savings which are generally risk averse (but very suitable for low risk green energy investments)
3) Ageing of wealthy class, making them more risk averse. Exceptions would be Silicone Valley where young entrepreneurs have huge personal wealth to invest in high risk ventures.
As these are mainly long term structural problems its very hard to see how they can be overcome. The right wing recipie of tax cuts only serves to make old risk averse people even more wealthy. Capital allowances for new technology investments are logical, but not enough to move the needle on their own. Support for R&D is critical, and here we could learn a lot from Germany, where Fraunhofer institutes across the country are jointly funded by central government, local government, and private businesses, so the risk of investment is shared across society. Few in the UK even know of it, let alone understand the scale of the investment. Spread over 72 centres throughout Germany the Fraunhofer employs 26,000 scientists, engineers and technical researchers, with an annual budget of 2.6 billion Euros. If Britain wants to compete in Global innovation we are going to have to raise our game substantially.
Thanks
I was not aware of that
Mr Bruce,
Thank you. What a valuable comment. It is well established that genuinely innovative start-ups look first to public sources of grants or investments; risk capital is almost non-existent. Famously this even apparently applied to the core of the original algorithm development by the new-born Google in the US (Mazzucato). Young start-ups in Britain can typically only interest venture capitalists or serious investment in the private sector, once they are sufficiently established (typically at someone else’s risk – often public sector grants/seed capital). It is an illusion that free-market Britain is a wonderful environment for genuinely entrepreneurial innovation. It isn’t.
Agreed, this is because what we actually have now is crony capitalism. As Dean Baker is often pointing out ,the system we have now did not happen by accident, it was planned. Globalisation and corporate lobbying has ensured we are slaves to a new world order. Nation sates no longer decide the way we live ,global corporations and institutions do now instead. And we mostly have no say in that or even “see” how it works in the bigger picture.
We live in a “fixed” world, or as Dean Baker puts it…..a “Rigged” world.
https://rwer.wordpress.com/2021/01/01/end-of-the-year-thoughts-on-inequality-and-its-remedies/
What I cannot avoid thinking about is the extent to which – for all the shortcomings in delivery, I set the corporate failure aside for others to discuss, in order to make this particular point – the Government wishes to focus its help on Corporate Britain. It does little for individuals. I believe the reason for that is purely ideological; neoliberalism is a corporate, free-market ideology; it is not just that society does not exist: people (save as abstract owners of capital and therefore entiled to be ‘free’) do not exist. Politics is a process exclusively aimed to deliver an environment safe for free-markets alone (it is of course obvious that the markets are not free but dependent on an artificially created market environment by government – i.e., it is ‘rigged’ – but neoliberals are not interested in reality). People are left to sink or swim in that ‘market’ environment.
People are purely a political problem in neoliberal politics; at best an inconvenience, more typically a blockage to free-markets. Helping them is defined ‘a priori’ as indulging “dependency”. Dependency and free-markets do not reconcile at the individual level; in spite of market themselves being wholly dependent on the shelter of protection offered by neoliberal government. Neoliberal ideology is an incoherent mess, but set that to one side here.
Thus we have a rampant virus, ripping through the country and the political class refuses to provide the financial, human and support resources to ensure people can safely and securely self-isolate, just for illustrative example (funding, accommodation if necessary, other support, food delivery and so on). This failure of effective policy has been clearly stated by public health and related specialists and authorities (Reicher and Pagel to mention two recent sources who have commented publicly).