Last Updated Sep 2, 2011 6:55 PM EDT
Corporations aren't spending. They say they don't want to take a chance on a faltering economy. But if they don't, they'll have nothing but a faltering economy. Companies are being penny wise and pound foolish, according to Richard Cookson, global chief investment officer at Citigroup (C), and data from REL Consulting and CFO Magazine.
If we fire everyone, think of how low our costs will be
Cookson makes the obvious point that there's only so far you can cut expenses and expect to do better. Hacking away at costs -- which includes not hiring people -- may keep Wall Street happy for a time.
But eventually you've cut everything you can. The more all corporations cut, the more people on unemployment. The more people unemployed, the fewer people there are to spend extra on goods and services.
Eventually the cut-till-you-drop mentality gets exactly that -- companies will drop in performance because people won't buy other than what they need. And telling companies to focus on "higher worth" individuals is ultimately foolish, because there aren't enough of them to actually use enough products and services to fuel the economy.
Borrowing to keep cash in the bank
But what's really astounding is on the financial end, according to the study by CFO Magazine and REL (a division of The Hackett Group). The thousand largest companies in the U.S. sat on a total of $853 billion in cash reserves at the end of 2010, which was a 6 percent jump over 2009, 30 percent more than in 2008, and a whopping 75 percent since 2007.
According to the research, U.S. companies have $780 billion in excess working capital. Companies are stockpiling cash like it was about to go out of style. Much of it owes to a combination of record profits and a lack of spending -- not better cash management, which only increased by 2 percent.
But, astoundingly, with all the profits, companies are borrowing to hoard that cash. The study says that debt has soared for corporations. The AAA-rated companies in the top 1,000 increased debt by more than 30 percent over the last five years. Yup, they're borrowing to overstuff the corporate mattress -- and very possibly are losing money on the resulting negative interest arbitrage.
Why are people looking at the government to do something about creating jobs? It's corporations that have to reverse some questionable practices and start creating the economy they say they'd like.
- Where the Jobs Are: Soldiering and the Fry Station
- Obama's Jobs Program: "Go Long" or Go Home
- How Rising Inequality Stunts the U.S. Economy
- How Flatlining Wages Are Suppressing the Economic Recovery