September 18, 2012 - In his new column for the Financial Post, MLI's Philip Cross outlines the serious errors in Mark Carney's 'dead money' comments. The column is a follow up to his August 30th column in the Financial Post, "Why Carney is wrong and 'dead money' is just fine."
Carney and cash
By Philip Cross, Financial Post, September 17, 2012
Mark Carney, governor of the Bank of Canada, has clarified his remarks about corporate Canada not spending enough and sitting on too much "dead money." He said, "I am not dictating to companies what they need to do," thereby demonstrating admirable self-awareness that he is a governor, not a dictator. He then proceeded to use his bully pulpit to, if not dictate, vigorously urge firms to spend more, touting the "massive opportunities" from global demand for commodities as if he were still pitching investment proposals in his old job at Goldman Sachs, not running our national bank. His statements recall the comment by bond-market guru James Grant that "central banks have gotten out of the central-banking business and into the central-planning business." Let's review how things evolved to this point.
It began with Carney's remarks about corporate savings and investment to reporters at a Canadian Auto Workers meeting in late August, followed by his Sept. 7 speech at Spruce Meadows in Calgary. There are two glaring factual errors in Carney's talks about business investment and cash holdings.
First, in the Sept. 7 speech, he said that "Since the start of the recession, total Canadian business investment has been below average … in comparison with other postwar recoveries." Lesson one from Business Cycle Analysis 101 is that the recovery is measured from the end of the recession, not from the onset of the recession. In a graph Mr. Carney produced with his Sept. 7 comments comparing previous business cycles, it is readily apparent that business investment growth since the end of the recession has been well above average. Taking the comparison back to the start of the recession, as he does, highlights that the slump in investment during the worst economic crisis since the Great Depression was more severe than during the average recession, not that the recovery has been abnormally weak.
Second, in remarks after his CAW talk, Carney said cash holdings by non-financial Canadian firms have "doubled," from about 4% of assets in 2001 to 7.6% in 2012. This data come from the quarterly survey of corporate finances, which asks firms their holdings of cash and to which firms evidently reply using a narrow definition of cash (see first graph). More comprehensive survey data from the National Balance Sheet Accounts show a much smaller increase in Canadian dollar cash holdings, from 16.7% of their financial assets late in 2007 (before the recession depleted cash reserves) to 17.8% in the first quarter of 2012. Adding in foreign currency cash holdings shows a larger increase over time, but this mostly reflects the rapid growth of operations and investments abroad, the very opposite of dead money even if the ensuing outlays are not counted in spending in Canada (see second graph).
Both surveys show just over two-thirds of the increase in corporate cash occurred before 2007, but that has nothing to do with dead money slowing the recovery. The time to speak up on that was before the recession. Instead Carney lobbed another contentious issue at corporate Canada in 2012.
Rather than the picture that the Bank paints of corporate Canada wallowing in cash and investing cautiously during the recovery, the facts show the opposite. Corporate cash holdings in Canada have increased only slightly since 2007, apart from its recession-related dip and rebound, while business investment is recovering at an above-average pace. Both trends are noteworthy, compared with savings by firms elsewhere in the world and with what could be expected in a global economic environment that is gloomy at best.
Read Carney's Sept. 7 tour of global economic prospects. The U.S. is tracking the "same dreary path of other developed countries that have experienced financial crises." Overseas, there is "an existential crisis in Europe." As for emerging markets, their "deceleration of growth in recent months has been greater than anticipated." Doesn't exactly inspire you to run out and spend, does it?
Bashing business for saving too much has a long and ignoble history. The Brandeisian wing of the New Deal Democrats held that business was prolonging the Great Depression by hoarding cash, and proposed a tax on retained earnings as well as more antitrust suits. Even if we accept the dubious concept of dead money, does the Bank of Canada think that hectoring corporate Canada will actually lead to more spending? This is its public-relations strategy to win friends and influence people?
While looking at comprehensive balance sheet data, take a peek at household holdings of cash. Cash rose from 25.5% of their financial assets just before the recession to 27.3% this year, an increase of 1.8 percentage points that slightly exceeds the increase for firms. Yet households escape the schoolyard reprimand from the principal about excessive caution, presumably because it is an understandable response to the uncertainty engulfing the world. Why anyone would expect a different response from firms, who are much more intimately engaged with the uncertain global environment, is difficult to fathom.
Most of Bay Street has been conspicuous by its absence from making extensive comments, reflecting that you don't have to be a dictator to have a stifling effect on public discourse. Why hasn't Canadian business responded to the tongue-lashing from the bank? Because they don't want to get into a spat with the man who controls the monetary levers of the economy, even if they disagree with his musings.