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The Lebowski Blog: Canadian Companies Are Hoarding $Billions for Another Crash

Blog posts reflect the views of their authors.

Where's the f'ing money, Lebowski?

Is a major crash coming to the Canadian economy? That might explain why corporations are sitting on hundreds of billions of dollars rather than spending it in taxes.

The economy looks to be doing well in a couple of areas...and by that I mean the major banks and large corporations are raking in massive amounts of cash.  Unemployment is still high, and political parties in power  - who get most of their donations and funding from large corporations - are ramming government budget cuts down the throats of the public.  

But there's some very troubling signs in the economy right now.  Mainly, Canadian debt keeps shooting up and up.  This isn't normal and is not a good sign.  High debt will eventually lead to something called 'deleveraging'.  In good times, deleveraging happens when the economy is booming and people are paying off their debts.  In bad times it comes from people going bankrupt.

Before bad deleveraging you always see a couple of things.  First, you usually see financial companies raking in the dough in a market that doesn't make any sense.  You saw this in the US when the financial companies where recording record profits even though the underlining elements of the economy (AKA fundamentals) looked very poor.

Similarly, bank profits in Canada seem to be a little out of whack with reality.  When results for their last quarter were released at the end of August, the CBC pointed out this:

The surprise in all the bank earnings announcements this week comes from the unexpected juxtaposition of surging profits and boosted dividends at a time when the entire banking industry is supposed to be facing a “tough operating environment,” as TD’s chief executive Ed Clark put it.

Banks supposedly don’t like rock-bottom interest rates. Too hard to make money. They don’t like it when consumers start to scale back their demands for credit, which they appear to be. We’re starting to see signs of a cooling housing market, where Canada’s banks hold millions of mortgages. Margins in some cases have been shrinking. The growth in the economy can best be described as modest. They all have exposure to the U.S. market, where conditions remain challenging.

The banks on the other hand were raking in profit!  Profit was up 45% and Income was up to a collective 7.8% Billion.  With the economy stagnant, and all the bad signs on the horizon, how does the bank rake in cash?

The other thing you see, is companies hoarding cash.  And why do you see corporations hoarding it?  Corporations hoarding cash is not normal.  Under normal economic conditions in Canada large companies sink their profits into investment.  They buy other companies, expand operations, hire new staff, get equipment , etc.  It's rare that you see them sit on cash lest another competitor beat them to the next-big-thing.  

But when times ahead are bad, you sit on the cash -  it helps you in a crisis.

And that's what Canada's major companies are doing.  Over $500 Billion is being hoarded by Canadian companies who are not using the money to hire new workers or to buy machinery.  The money is largely coming from corporate tax cuts from the last several years as well as cuts to jobs and the belt tightening that has come from the crash.

While claims of cash hoarding have mostly come from unions, even the head of the Bank of Canada has noted that the long held beliefs about tax cuts and economic theory are built on quicksand.

Speaking to the CAW convention in late-August, Mark Carney said that corporations should not be sitting on that cash, that they should be investing it in the economy.  He called it 'dead money'.  Corporations quickly threw up a shot-gun defense.

Bt the real question is this:  if they are raking in the cash why aren't they spending it?  Why is it just sitting there?

A Calgary CEO says it best in the Globe and Mail:

“Corporate guys have come through such a frightening scare in 2009, where they were getting out of bed every day not knowing if they were going to have a bank,” said Matt Campbell, CEO of Rocky Mountain Dealerships Inc., a Calgary-based chain of construction and agriculture equipment dealers.

“A lot of people are still pretty concerned that a second shoe might drop with Europe....And what happens if the U.S. goes back into recession?”

Of course who would you rather see sitting on a pile of cash in an economic crisis? Would rather that fat cats have a rainy day fund or would you rather see a government able to start spending to help people make ends meet? Jim Stanford in Rabble:

"Since much of that hoard is directly attributable to corporate income tax cuts, I'd prefer giving the money back to governments, who could then spend it on public capital and infrastructure projects, thus generating far more economic benefit than would be derived from pumping more money into the chequing accounts of wealthy investors."

The Lebowski blog tracks big piles of money.  It appears regularly on the Toronto Media Co-op.

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