Carney vs Myers: Economists face off over “dead money”

- August 23rd, 2012

The line story on Bay Street’s favourite newspaper, The Globe and Mail, had a great eye-catching headline courtesy of Bank of Canada Mark Carney:

This is Dead Money

Carney, responding to questions from reporters, noted that Canadian companies (not including banks and insurance companies) now have $562 billion in cash in the bank, up from $370 billion in 2009. That $562 billion represents about 13.2 per cent of total assets — an all-time high — compared to 10.3 per cent of total assets in 2009.

“This is dead money,” Carney told reporters, giving them the kind of  sexy quote you rarely if ever see from a central bank governor. “If companies can’t figure out what to do with it, then they should give it to shareholders and they’ll figure it out.”

Well, Bay Street freaked out today. No way were they going to be dissed by the Bank of Canada governor (even if he is a former Goldman Sachs golden boy, chairman of the Financial Stability Board that’s supposed to fix Europe, and a one-time goalie of Harvard’s hockey team.)

Here’s Jay Myers, the president and CEO of the country’s biggest big business lobby group, the Canadian Manufacturers and Exporters and though he may not have Harvard on his resume, he does have economics degrees from the London School of Economics and Oxford University. Plus, he grew up near my hometown, in Fergus, Ont. which means he’s got good ol’ small-town Ontario common sense on his side! Here’s a statement put out by the CME:

“It’s true that businesses are holding more cash”, Myers says. Cash and short-term deposits have increased by $60 billion across the non-financial business sector, and by $10 billion in the manufacturing sector, since 2008.

But, as Myers points out, cash now comprises only a slightly larger share of total assets than four years ago. “There are also good financial reasons for businesses to hold more cash. The value of other short term assets like accounts receivable and inventories has dropped while short-term borrowing and other liabilities have increased.”

“In the current economic climate, holding more cash is a good asset allocation decision. It is certainly not an indication that companies are wasting their money or that they have not been focusing on investments to grow their business or boost productivity.”

“In spite of intense competitive pressures and a strong dollar, Canadian businesses, and manufacturers in particular, know that capital investment is essential to their survival.”

“Manufacturers have benefited from a lower tax rate and a two-year write-off for their investments in machinery and equipment. We are certainly seeing the benefits of recent tax reforms in today’s high risk business environment.”

Globe reporter Carrie Tait, meanwhile, spent the day rounding up opinions from the likes of Encana, Open Text, RIM and other major players in Canada’s corporate firmament who have piles of cash on their balance sheets and she found lots of good excuses. But here’s the thing: This ain’t just Carney telling corporate Canada to get its you-know-what in gear and start putting its cash to work. Carney is easily taking the lead from Prime Minister Stephen Harper who has been talking about “money on the sidelines” for months, not only in Canada, but wherever he is on the world stage, for months.

 

Categories: Economy

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2 comments

  1. Catherine Soplet says:

    “Dead Money” pimps my ride — Mark Carney called it right.

    The “dead” money, hoarded as windfall from historical reduction of Canadian and Ontario effective corporate tax rates, is not being locally invested in R&D invention, nor in innovation.

    Instead, corporate demands are placed for increased government supply of skilled knowledge workers from public and post-secondary education, ready to step into the economic harness to produce private profits.

    In the meantime, governments borrow and pay interest on funds to bridge the shortfall between uncollected taxes and increased demand for human capital investments, as government also supports the individuals who incur student bursaries and debt in the quest to certify their employment eligibility — yet another suck on the public teat.

    Nice game if one can rig it. Private profits from public investments… at a preferential tax rate.

    “Dead Money” kinda looks like … pimp my ride.

  2. Andrew Baldwin says:

    Governor Carney should stop proffering advice to Canada’s corporate leaders on how to do their jobs and start taking his own job more seriously. He is supposed to be in charge of an inflation-targeting central bank but no other central bank in the world targets an inflation indicator that looks like our CPI All-items and none ever will. In spite of that he signed off on a renewal of the inflation control target last November that not only left nothing unchanged, but outlined a research agenda that ignored even the possibility of changing the inflation indicator in future. He might have noted when he was speaking in Toronto that next month the United Kingdom Statistical Authority rules on adding an owner-occupied housing (OOH) component to its CPI, used by the Bank of England as its inflation indicator, to create a new CPIH series. The Bank of England has not said it would adopt the CPIH as its inflation indicator yet, but it did highlight the development in its August inflation report. For Canadians, this is especially interesting since the United Kingdom is the one and only country in the world that publishes an official index of consumer prices using the same approach to OOH found in our CPI All-items, in its Retail Price Index. However this approach wasn’t even considered by the UK’s Consumer Prices Advisory Committee (CPAC) when they made their choice of the two favoured approaches (net acquisitions and rental equvalence) from a list of four. And rightly so, since the particular variant of user cost used in the Canadian CPI and the UK RPI is well-suited to escalation, but not at all apprpriate to an inflation indicator. Governor Carney may have worked in the UK, and have an English wife, but he doesn’t seem to pay any attention to monetary policy developments outside of Canada, at least in regard to the price indexes used for inflation targeting. Governor Carney’s term ends in the winter of 2015, so he won’t have another opportunity to review the inflation control target in his term in office, if the current agreement runs its full term to 2016. By that time, the European Central Bank and the Bank of England may both be using better inflation indicators than the Bank of Canada in terms of their treatment of OOH. Their present indicators are already much better than the Bank’s in other important respects.

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