Companies Are Piling Up Cash(nytimes.com)
nytimes.com
Companies Are Piling Up Cash
http://www.nytimes.com/2008/03/04/business/04cash.html?ex=1362286800&en=2ad4d7b89b86c518&ei=5090&partner=rssuserland&emc=rss&pagewanted=all
4 comments
So the point of the upcoming tax relieve is to inject money into the economy via consumer spending to prevent the recession. Yet, at the same time, money is resting in the savings account of companies to protect them from the recession. These two approaches to dealing with the economy on behalf of the government and companies seem to contradict each other.
Also, isn’t the company’s goal to maximize shareholders’ return on their investments? Of course, one can make a case for storing cash to increase long-term returns, but if the company is retaining the cash for its sake, let the shareholders have it. I’d rather have the companies I invest in make me money; otherwise, I have a savings account on my own.
Also, isn’t the company’s goal to maximize shareholders’ return on their investments? Of course, one can make a case for storing cash to increase long-term returns, but if the company is retaining the cash for its sake, let the shareholders have it. I’d rather have the companies I invest in make me money; otherwise, I have a savings account on my own.
wait for smaller companies to feel the crunch, then buy them. Cheap expansion model.
All right. Let's say you're correct, and companies are hoarding cash to manipulate the financial system. Furthermore, let's say that the Fed is not going to react to this.
ExxonMobil made about $40 billion in the last year. If they save every single dime (in cash, not in savings accounts, investments, or anything else that transfers liquidity), they will be able to reduce the money supply by -- wait for it! -- almost 3%! That is a gross change of 3%. Factor in the expanding money supply, and Exxon hasn't even reversed inflation, much less brought about a deflationary crunch.
Even if they can do this, how much do they benefit? Exxon will have sacrificed the interest on $40 billion in cash (that is a lot of money, even these days) in a risky scheme to reduce asset prices. But Exxon isn't the only bidder -- it has a market value of $460 billion, compared to a global market value of $51 trillion (http://en.wikipedia.org/wiki/Market_capitalization). So if Exxon is using their stock, and they're a rational actor like everyone else, they're going to take 100% of the risk for less than 1% of the benefit. In other words, the total return on their 'investment' in deflation has to be at least 10,000%!
And even then, you have to factor in their shareholders' reactions. Manipulating the money supply is not exactly a great use of corporate cash, and you can't even admit that you're doing it if you want the manipulation to work (otherwise, other actors will treat the mysterious, tiny drop in money supply as a temporary aberration, knowing that Exxon will cut it out some day). Given this apparent flagrant waste of corporate resources, you might expect their stock to drop precipitously. Exxon earns about 39% on equity (probably something closer to half that on marginal equity). Dropping that to zero won't make shareholders happy, and I don't think that risk is priced into the stock at $86/share.
So. Your theory is insane.
ExxonMobil made about $40 billion in the last year. If they save every single dime (in cash, not in savings accounts, investments, or anything else that transfers liquidity), they will be able to reduce the money supply by -- wait for it! -- almost 3%! That is a gross change of 3%. Factor in the expanding money supply, and Exxon hasn't even reversed inflation, much less brought about a deflationary crunch.
Even if they can do this, how much do they benefit? Exxon will have sacrificed the interest on $40 billion in cash (that is a lot of money, even these days) in a risky scheme to reduce asset prices. But Exxon isn't the only bidder -- it has a market value of $460 billion, compared to a global market value of $51 trillion (http://en.wikipedia.org/wiki/Market_capitalization). So if Exxon is using their stock, and they're a rational actor like everyone else, they're going to take 100% of the risk for less than 1% of the benefit. In other words, the total return on their 'investment' in deflation has to be at least 10,000%!
And even then, you have to factor in their shareholders' reactions. Manipulating the money supply is not exactly a great use of corporate cash, and you can't even admit that you're doing it if you want the manipulation to work (otherwise, other actors will treat the mysterious, tiny drop in money supply as a temporary aberration, knowing that Exxon will cut it out some day). Given this apparent flagrant waste of corporate resources, you might expect their stock to drop precipitously. Exxon earns about 39% on equity (probably something closer to half that on marginal equity). Dropping that to zero won't make shareholders happy, and I don't think that risk is priced into the stock at $86/share.
So. Your theory is insane.
I meant to upvote you but I hit the wrong arrow again (small arrows, iPhone and train don't work well together).
you took it insanely; I mean what I said, they are holding cash, while other companies struggle - then acquire. Them holding the cash has nothing to do with the other company.
"Buy stuff with the cash you haven't already spent on buying stuff" is not exactly a strategy.
So, a naive interpretation of this state of affairs is companies are ripping off consumers by over-charging them, and are also partly responsible for the credit crunch?
Nah, they're just not hiring and reinvesting at the moment. They haven't jacked up prices or anything, just reining in their business.
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Higher profits and cash accumulation are an understood macro-economic symptom of credit expansion. Consumers buy stuff with money earned from business production (mostly wages), so consumption is constrained by the amount of production going on. Cut back on wages and production on a macro level and then demand sinks and businesses make less money. But introduce heavy spending on credit and consumption is no longer constrained by aggregate production outlays. People spend money they didn't earn. Businesses can cut back on wages and still find themselves making large paper profits.
The problem with this picture is you're looking at a transfer of wealth, by way of inflation, from currency holders to those positioned to leverage credit on the best terms.
The problem with this picture is you're looking at a transfer of wealth, by way of inflation, from currency holders to those positioned to leverage credit on the best terms.
Interesting. So companies would have to raise prices to prevent consumers from over-stretching themselves - but of course they have no reason to do this, they should just take the money and hoard it for use later?
We're talking about an artifact of monetary policy. It's not really a matter of what businesses should or shouldn't do.
Right, but bear with me - in my 'fantasy economy', one thing companies could do to prevent consumers over-reaching themselves is raise prices? I'm not saying they should, or would do this. I assume all they should do is make money for their owners (and hang the consequences, lol)?
"... companies, especially in the technology realm, have enough cash to expand their market share through acquisitions."