Paging Hyman Minsky
Why Are Firms Saving So Much?, asks The Economist. A number of economists offer thoughts, including Hal Varian, Brad DeLong, and Mark Thoma. Andrew Smithers points to some data.
despite the rise in US corporate cash flow, non-financial corporate balance sheets have continued to deteriorate. At the end of the first quarter of 2010 their domestic debt was at record high levels whether measured gross (61.4% of net worth) or net of cash and other interest bearings assets (46.8% of net worth). The factors contributing to this combination of a high level of corporate savings and deteriorating balance sheets are (i) the extraordinary proportion of financial profits to total profits, and (ii) the persistence of a high level of corporate equity buy-backs.
The question itself seems to want to set off the beeper of the late Hyman Minsky. Minsky’s view was that in normal times, firms borrow money to finance investment. In boom times, they borrow money to finance Ponzi schemes. When the Ponzi schemes crash, they rely on internal finance. As I understand the Minsky cycle, for firms to save rather than spend is exactly what one would expect right now, during the “hedge finance” phase.
In fact, Smithers’ comments lead me to worry that firms in the nonfinancial sector are not saving enough. During the housing bubble, we built up a distortion in that the financial sector became disproportionately large and profitable. The bailouts and the stimulus have kept the financial sector strong. As a result, we now have the distortion without the housing construction. Sort of the worst of all possible worlds.
[UPDATE: Fareed Zakaria writes,
The Federal Reserve recently reported that America’s 500 largest nonfinancial companies have accumulated an astonishing $1.8 trillion of cash on their balance sheets. By any calculation (for example, as a percentage of assets), this is higher than it has been in almost half a century.
If I read Smithers, U.S. nonfinancial corporations are hurting. If I read Zakaria, their pockets are bulging. One possibility is that the top 500 nonfinancial firms have bulging pockets, and the rest of the sector is hurting. Otherwise, Smithers and Zakaria are looking at different balance sheet measures, and I have no idea which one is a better indicator.]
Jul 5 2010 at 6:36pm
These could both be true. Since interest rates are low & equity is selling cheap, it would make since that companies would be trading equity for debt. So, operationally, they may be bringing in cash. But they are reducing equity through buybacks & funding operations with more debt. It seems perfectly rational.
As an amateur, it looks like the simple story is that on a macro level, investors are fleeing risk, so corporations are sending cash to investors, investors are saving the cash & the banks are loaning it back to the corporations.
It may make the balance sheets look bad, but it seems to me that the corporations are getting a good deal on both sides of the process, and shareholders who have equity now will benefit in the long term.
Jul 5 2010 at 6:45pm
Low interest rates, remember? So now is a great time to borrow lots and lots and lots of cash (and also rack up a lot of debt).
Jul 6 2010 at 10:46am
It used to be that investment went into infotech, Silicon Valley, etc. Now money is coming out of that sector – Google, Apple, and Microsoft should be paying big dividends, etc. That sector is returning money to investors (share buybacks, Oracle buying Sun, Peoplesoft, JD Edwards, etc.) Energy and transportation are the obvious areas for new investment, but we’re stuck with 19th century technologies in both. So maybe the solution is in Obama’s weatherproofing and tire inflation policies . . . that is where the next big breakthrough is going to come.
Jul 6 2010 at 3:09pm
They’re not making any sales. The two are inverse.
Jul 6 2010 at 3:56pm
It is simply the sum of two things: the liquidity premium is higher than recent history, and the risk premium on deployment of savings is also substantially higher.
Jul 15 2010 at 5:31pm
As a practitioner, I would note that Smithers is among the very, very best analysts of corporate dividend policy, profit margins and capital structure. He has done the best work in analyzing Q-ratios for the UK and US markets, and cyclically adjusting various earnings measures. His intellectual rigor and familiarity with the data are deep.
I don’t know about Zakaria, but I would be surprised if a non-specialist could approach Smithers’ abilities.
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