Sunday, October 3, 2010
Companies borrow at low rates, but don't spend
Ever since the collapse of the economy in 2008, big corporations have not invested or spent any of they're money. All of these corporations can borrow money at very low interests rates, but have not hired new workers or anything. They are saving and waiting for the economy to go back up before they start spending it again. But the problem is that the economy may not go back up if these corporations are not spending any money. The monetary policy that the federal reserve is intended for them to start spending, but these corporations are not. Some estimate that these corporations are sitting on 1.6 trillion dollars combined, about 6 percent of they're assets. These corporations need to start hiring and investing to help the economy grow, and if the economy is growing, it will be better for the corporations in the end. But the question is when will corporations start spending money on hiring new workers? If corporations sit tight the way they have been doing, how long will it take for this economy to be prosperous again? Whatever the case may be corporations need to start spending money now.
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The great depression has brought about two negatives when looking at a large individual company: They have stopped hiring and the amount of cash they are holding on to has increased (avg 6%). This cash to total asset ratio is much too high for the economy to bounce back. At some point, these companies need to start taking a risk - increase investment, thus reducing their excess cash and increasing their employment numbers. The private sector needs to take action, otherwise fiscal policy will continue to lose impact.
ReplyDeletewhile I agree with Josiah that companies need to spend to help stimulate the economy if you look at the situation from the corporations perspective they have no incentive to spend. They see an uncertain economic future with volatile consumer spending. this does not encourage spending, so the companies are building up their funds until they see sustained economic recovery, at which point they will invest massively to bring their capital and labor force up to date.
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