As the FT notes this morning:
US companies are sitting on trillions of dollars in cash that they borrowed to survive the coronavirus shock of 2020. The question now is what they do with all that money, especially if an economic recovery takes hold. Corporate America borrowed a record $2.5tn in the bond markets last year.
As they go on to note, some borrowed because they were losing money, very heavily. But that was not true of all companies:
Companies in the US S&P 500 index built up an additional $1.3tn of cash on their balance sheets last year, according to data from S&P Capital IQ. Many businesses are having to decide what to do with their borrowed fortune.
At the same time, the FT also ran an article this morning on small businesses running out of cash in the UK, and being worried that they have insufficient left to take the risks of reopening after the crisis is over.
The contrast in fortunes is stark, and indicative of two things. One is the randomness of the impact of this crisis, that few if any foresaw in their plans. The other is that the consequences of that randomness will be very long lasting, and as deeply unfair.
The simple fact is that those with the fortune to have had a ‘good pandemic', both in terms of their business sector and their ability to access the economic recovery programmes on offer, will be able to exploit that advantage. In other sectors the weaknesses will be long lasting.
As we also well know now, this is also true within the household economies of the UK, and elsewhere. Some households have been incredibly well protected during the crisis, and at least economically have done well from it. Others have seen their fortunes decline, very rapidly.
There are no absolute rules here, but there do appear to be trends. Amongst companies being large helped, enormously. Access to capital markets where interest rates have been incredibly low has provided considerable advantage to larger companies, indicated by the ability of some to create cash piles in this situation.
For most (but not all) smaller businesses the risks have been very much greater, and many have simply fallen through the gaps in the system altogether.
Amongst households, there is no doubt that being in a higher income group and in a job associated with that has been a significant advantage. The most vulnerable have generally been lower paid front-line staff.
There is then a simple question to ask now, and that is whether or not these twists of fate should now shape the well-being of many for years to come? That is the very obvious risk that we face. And if we accept that fate decrees that such randomness is just, and simply to be tolerated, then the consequences will be staggeringly big for decades.
The first question to be asked is whether that is fair?
The second is, if not, what do we want to do about it?
Implicit in the second is, of course, a belief that something can be done. I have no doubt that is possible. Businesses can be supported if it is thought appropriate. So too can sectors. As can people left vulnerable. But that requires that we think that the mythical ‘invisible hand' of fate within market based capitalism should be ignored , even when much of the good fortune some enjoy now has arisen because they have become the lucky beneficiaries of state support.
Covid has posed many questions. The point I am making is that the issues will not end when the immediate threat from the virus is over, whenever that might be. There are now much bigger questions to debate, to which the answers may be much harder to get agreement upon. But they will shape post-Covid society, with the risk of divisions the consequences of which are not hard to imagine unless action is taken.
So, what to do?
In the first instance, the requirement is to not pretend, as many are, that the vaccine ends this. We have a long, long way to go as yet.
Thereafter, we as a society need to face up to this. There is a post-Covid society to shape, and it is not like the one that existed before we went into this, simply because that no longer exists. But are we big enough to accept that?
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What do we want the post COVID world to look like? Well, how long have you got?!
On the narrow issue of the corporate debt market I think there are some interesting issues.
First, why the borrowing ‘binge’? Simply precautionary. With rates as low as they are and credit spreads as tight as they are (due to Fed intervention and investor craving for yield) it was (and still is) a cheap insurance policy.
Second, what is this behaviour telling us?
Most importantly (and obviously) it says that corporates are still scared of what the pandemic might do.
Further out, once the crisis is over (and I mean “will my business make it through to next year?” not “when will the pandemic end?”) what will they do with the money? Probably nothing – there are few investment opportunities that make sense for corporates. I suspect that this protective cash balance will stay in place for a long time as the memory of two “existential” crises (2008 and 2020) in 12 years will shape the thinking of anyone over 35 for the rest of their careers. Oddly, this corporate borrowing is NOT about leveraging up it is about building a safer balance sheet… which means REDUCING (NET) debt.
For you and I the solution is obvious – (1) if the corporate and individual sectors are saving then the government must borrow and (2) if corporates can’t find investment opportunities then the government needs to drive that process because we know there is so much to be done (Green projects etc.).
I am inclined to agree
Most especially with the inaction and your last point
“Most especially with the inaction and your last point”
I would propose that the reason for the inaction is twofold; not just for the reason Mr Parry rightly proposes; “there are few investment opportunities that make sense for corporates” (incidentally, how beautifully Delphic that phrasing is – how ‘corporate’). In addition it is because ‘corporates’ (the large long-established giants of the private sector) are not in fact what neoliberalism claims is the nature of the free-market, entrepreneurial, dynamic private sector: in fact they are not risk-takers, they are not innovators and they are completely without imagination; if they filled any of these criteria they would not go far in corporate advancement.
The reality of the corporate business ‘vision’ (blinkered and myopic by genetic necessity), is that they would probably prefer to acquire their competitorsbefore anthing else; if these competitors hold novel patents (unused in a drawer – because that is what corporates do), they are unlikely to exploit them, but rather bury them (nless they are merely enablers to cost-cutting). They would always prefer growth by acquisition/elimination of competition – because it requires almost no thinking and absolutely no innovation. Growth is based on cost-cutting and repeating past success forever.
Innovation is more typically a public sector sponsored attribute of economic activity. In modern advanced economies, it increasingly spins off university break-throughs and typically relies for initial investment on public or government sources (beginning with grants, not investment).
It is not the amount of initial funding that is critical – it is the stamp of first approval, of authentication of credibility in the idea. Only then do the Vulture Capitalists swoop in with risk capital. They do not like to take unknown risks. They let the public sector do it for them, spend money (often grants) and then move in. They like precariously funded innovators most of all. Easy meat. Typically the Vulture Capitalists will be quite keen to cut a deal with the innovator that will be sufficiently demanding of the innovator that he/she actually fails to meet the targets. This triggers conditions in the deal (trip-wires) in the funding that allows the Vulture Capitalist to take over the whole project cheaply, and either sideline or force the exit from the project of the innovator.
There are times that Vulture Capitalists do rush in, ‘in extremis’ only. The dot,com boom was a classic example, they piled in because they became frightened they would be left behind. They went over the edge, ‘en masse’. Lemmings receive an unwarranted bad press, the Vulture Captialists are the real Lemmings; they are followers. They never knowingly lead anything. This is the reality behind neoliberalism’s claims to the private sector’s enterpreneurialism. It rarely exists in the real world, and would rarely even be born if there was no public sector.
Research I am working on for many months shows there is real investment in some corporations
I am not quite sure when it will be out yet, but it does not quite agree with you because there are exceptions to your rule
But maybe exceptions prove the rule
I almost added that there are exceptions (because there are – but I believe the answer to that is ‘so what?’), but decided such a comment was too wishy-washy, and would look like a fudge. I believe that my perception is accurate, although I acknowledge it may now be out of date; but I wrote this anyway, because I rather doubt the putrefaction of the supposed spirit of innovative investment in the conventional investment ‘private sector’ has changed much.
Most major corporates retain their position not, I submit, from innovation but because they have an established major market share in a long lasting commodity or technology (each with huge entry costs for competitors).
Genuine innovators of major new technology rise to dominant position, replacing older corporates who lacked the capacity or vision, or risk-taking propensities to innovate. This is repeated over and over again. Now it is Amazon, Apple, Google and Musk. Fifty years ago it was Bell Telephone and General Motors. Sot it goes – always.
[…] Cross-posted from Tax Research UK […]
My worry remains the potential to level down and not up in terms of wages and conditions of service.
Because that will be used to compete in the world economy and particularly our latest competitor – the EU.
I expect a large episode of ‘irrational exuberance’ after Covid, with green issues and the like being seen as ‘buzzkill’ concepts.
And the other fundamental is – what about next time we have a virus? How prepared will we be? What have we learnt?
I’m not very hopeful TBH.
Muddling through because we are worried about ‘debt’ seems to be ingrained.
I am not as optimistic as usual