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No, not yet but even the BBC is starting to see the debt will DOUBLE by 2018..........
Trillion pound cash mountain to the rescue? It’s unwise to bank on it
Meaningless though it might otherwise be, the downgrade in Britain’s credit rating at least acts as a reminder of just how deeply mired in post-crisis gloom the UK economy really is, and quite how difficult extracting the country from the ruination of more than a decade of banking excess and burgeoning social spending commitments is proving.
Even if there is a great pile of corporate cash locked up in the City, it's quite unlikely noticeably to benefit the UK economy Photo: Rex Features
By Jeremy Warner
8:40PM GMT 25 Feb 2013
16 Comments
Still, unlike much of the beleaguered eurozone periphery, at least we’ve got political stability. Or have we? With the deficit reduction strategy essentially derailed by lack of growth, George Osborne, the Chancellor, finds himself under attack on all sides.
Labour wants temporarily to abandon fiscal consolidation, Lib Dem Coalition partners are demanding higher capital spending and are sticking their heels in on entitlements, and the Conservative Right think only tax cuts funded by much deeper reductions in social spending are capable of returning the economy to growth.
Financial markets are already beginning to wonder what happens the other side of the May 2015 election, even assuming the Coalition survives that long. Political uncertainty is piling in on top of economic and fiscal instability, a gruesome threesome of negatives that threatens to undermine international confidence in the pound.
In response, Mr Osborne promises religiously to stick to Plan A, yet unfortunately it is no longer sufficient. As Ross Walker of Royal Bank of Scotland points out, two and a half years into the fiscal consolidation plan, expenditure still exceeds revenues by a sickening 6pc of GDP. Current spending is refusing to come down as anticipated, while the tax take is equally stubbornly refusing to rise to fill the gap. Tullett Prebon’s Tim Morgan adds bluntly that the UK government is still spending far too much relative to its revenue-generating capacity – Britain has become a debt junkie, seemingly incapable of living within its means.
Conventional Keynesian analysis suggests that this is not necessarily a long-term problem, if only UK corporations – and to a lesser extent, households – could be persuaded to stop hoarding and start investing and spending again. In this apparently perfectly balanced world, rising public indebtedness is only the mirror image of a growing private sector propensity to save.
Yet it is not just Keynesians who await the reversal of this corporate hoarding. Coalition ministers too regularly cite the fabled corporate “cash mountain” as one of the chief barriers to growth. Unlock these tight-fisted corporate treasuries, and apparently many of our problems would be over.
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Well, I’ve been looking at some of the data on this presumed phenomenon, and regrettably, they don’t really back the notion of some sort of corporate investment tsunami waiting to be unleashed. Nor, to the extent that the cash hoarding exists at all, do the reasons for it.
It’s perfectly true that companies have been steadily building up their cash reserves. Many have also been paying down debt. But these trends pre-date the crisis by some years, and it is by no means clear that they have been much accelerated by it. According to data contained in the ONS’s economic accounts, total cash deposits among private non-financial corporations were £672bn in the third quarter of last year, a big number, admittedly, but less than £50bn higher than they were before the crisis began and hardly enough to explain the great “compensating” leap in public indebtedness.
Nor does the picture look notably different once borrowings are netted off, with net financial liabilities in UK plc having fallen from £1.8 trillion in 2007 to £1.7 trillion by the third quarter of 2012.
Recent analysis by credit rating agency Standard & Poor’s points to a similar picture in Europe as a whole.
Corporate cash has risen, but not by nearly as much as widely imagined, and in fact, it topped out a little while back on both sides of the Atlantic and is now gently falling. I’m not saying that the phenomenon is a myth; once bank deleveraging is taken into account, then the swing in private sector financial balances is plainly much bigger. But the idea that there is some great flood of pent-up corporate investment about to come sweeping in to revitalise Europe’s drought-afflicted economy is almost certainly misplaced.
The figures just cited are, of course, just statistics, and it may be that they don’t fully capture what’s really going on. But even if there is a great pile of corporate cash locked up in the City, it’s quite unlikely noticeably to benefit the UK economy. London is a popular location for multinational headquarters. Just because they keep the cash here – sometimes for tax reasons, sometimes simply for reasons of corporate tidiness – doesn’t mean they are going to spend it here.
Standard & Poor’s analysis finds that the proportion of capital spending by Europe’s top 1,000 private sector companies which is earmarked for projects outside Europe has risen from 28pc of the total in 2008 to 42pc today. Again, contrary to received wisdom, corporate capital spending has not actually fallen that much since the crisis began; it’s just that growing quantities of it are destined for the growth markets of the developing world.
At a recent Association of Corporate Treasurers conference at which I was a speaker, it was pointed out that cash accumulation is the result not just of better cash-management techniques, but suspicion of banks, which have been shrinking their balance sheets and therefore cannot be relied on to lend when needed.
Holding rather larger cash balances may therefore be a semi-permanent corporate phenomenon.
Mistaken as an anomaly, it is probably just part of the “new normal”, the more cautious and risk-averse world we find ourselves in. It’s good for solvency, but not much good for growth.
This revolution in the way companies manage their finances finds its expression in another curiosity; that non-banks are now far and away the biggest source of finance for companies, in the form of Accounts Receivable.
This is merely an internalised form of finance among companies, where credit is granted by suppliers and then passed on to customers. A world in which banks become largely superfluous to requirements no longer looks entirely fanciful.
All these phenomena are part of a post-crisis new economy; in themselves, they are very healthy developments, but they are quite negative for many of the old assumptions.
There is no great pent-up wall of corporate investment just waiting for the flood gates to be opened, just as governments can no longer rely on the candyfloss tax revenues of finance to underpin their spending commitments. Much of the growth in productive activity that is taking place, for instance in the digital and black economies, is not caught by the tax system at all.
Not until governments grasp the nettle of serious entitlement and supply-side reform will they lift their economies out of this funk.
Jeremy Warner
In Finance »
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Trillion pound cash mountain to the rescue? It’s unwise to bank on it
Meaningless though it might otherwise be, the downgrade in Britain’s credit rating at least acts as a reminder of just how deeply mired in post-crisis gloom the UK economy really is, and quite how difficult extracting the country from the ruination of more than a decade of banking excess and burgeoning social spending commitments is proving.
Even if there is a great pile of corporate cash locked up in the City, it's quite unlikely noticeably to benefit the UK economy Photo: Rex Features By Jeremy Warner
8:40PM GMT 25 Feb 2013
16 Comments Still, unlike much of the beleaguered eurozone periphery, at least we’ve got political stability. Or have we? With the deficit reduction strategy essentially derailed by lack of growth, George Osborne, the Chancellor, finds himself under attack on all sides.
Labour wants temporarily to abandon fiscal consolidation, Lib Dem Coalition partners are demanding higher capital spending and are sticking their heels in on entitlements, and the Conservative Right think only tax cuts funded by much deeper reductions in social spending are capable of returning the economy to growth.
Financial markets are already beginning to wonder what happens the other side of the May 2015 election, even assuming the Coalition survives that long. Political uncertainty is piling in on top of economic and fiscal instability, a gruesome threesome of negatives that threatens to undermine international confidence in the pound.
In response, Mr Osborne promises religiously to stick to Plan A, yet unfortunately it is no longer sufficient. As Ross Walker of Royal Bank of Scotland points out, two and a half years into the fiscal consolidation plan, expenditure still exceeds revenues by a sickening 6pc of GDP. Current spending is refusing to come down as anticipated, while the tax take is equally stubbornly refusing to rise to fill the gap. Tullett Prebon’s Tim Morgan adds bluntly that the UK government is still spending far too much relative to its revenue-generating capacity – Britain has become a debt junkie, seemingly incapable of living within its means.
Conventional Keynesian analysis suggests that this is not necessarily a long-term problem, if only UK corporations – and to a lesser extent, households – could be persuaded to stop hoarding and start investing and spending again. In this apparently perfectly balanced world, rising public indebtedness is only the mirror image of a growing private sector propensity to save.
Yet it is not just Keynesians who await the reversal of this corporate hoarding. Coalition ministers too regularly cite the fabled corporate “cash mountain” as one of the chief barriers to growth. Unlock these tight-fisted corporate treasuries, and apparently many of our problems would be over.
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25 Feb 2013
Well, I’ve been looking at some of the data on this presumed phenomenon, and regrettably, they don’t really back the notion of some sort of corporate investment tsunami waiting to be unleashed. Nor, to the extent that the cash hoarding exists at all, do the reasons for it.
It’s perfectly true that companies have been steadily building up their cash reserves. Many have also been paying down debt. But these trends pre-date the crisis by some years, and it is by no means clear that they have been much accelerated by it. According to data contained in the ONS’s economic accounts, total cash deposits among private non-financial corporations were £672bn in the third quarter of last year, a big number, admittedly, but less than £50bn higher than they were before the crisis began and hardly enough to explain the great “compensating” leap in public indebtedness.
Nor does the picture look notably different once borrowings are netted off, with net financial liabilities in UK plc having fallen from £1.8 trillion in 2007 to £1.7 trillion by the third quarter of 2012.
Recent analysis by credit rating agency Standard & Poor’s points to a similar picture in Europe as a whole.
Corporate cash has risen, but not by nearly as much as widely imagined, and in fact, it topped out a little while back on both sides of the Atlantic and is now gently falling. I’m not saying that the phenomenon is a myth; once bank deleveraging is taken into account, then the swing in private sector financial balances is plainly much bigger. But the idea that there is some great flood of pent-up corporate investment about to come sweeping in to revitalise Europe’s drought-afflicted economy is almost certainly misplaced.
The figures just cited are, of course, just statistics, and it may be that they don’t fully capture what’s really going on. But even if there is a great pile of corporate cash locked up in the City, it’s quite unlikely noticeably to benefit the UK economy. London is a popular location for multinational headquarters. Just because they keep the cash here – sometimes for tax reasons, sometimes simply for reasons of corporate tidiness – doesn’t mean they are going to spend it here.
Standard & Poor’s analysis finds that the proportion of capital spending by Europe’s top 1,000 private sector companies which is earmarked for projects outside Europe has risen from 28pc of the total in 2008 to 42pc today. Again, contrary to received wisdom, corporate capital spending has not actually fallen that much since the crisis began; it’s just that growing quantities of it are destined for the growth markets of the developing world.
At a recent Association of Corporate Treasurers conference at which I was a speaker, it was pointed out that cash accumulation is the result not just of better cash-management techniques, but suspicion of banks, which have been shrinking their balance sheets and therefore cannot be relied on to lend when needed.
Holding rather larger cash balances may therefore be a semi-permanent corporate phenomenon.
Mistaken as an anomaly, it is probably just part of the “new normal”, the more cautious and risk-averse world we find ourselves in. It’s good for solvency, but not much good for growth.
This revolution in the way companies manage their finances finds its expression in another curiosity; that non-banks are now far and away the biggest source of finance for companies, in the form of Accounts Receivable.
This is merely an internalised form of finance among companies, where credit is granted by suppliers and then passed on to customers. A world in which banks become largely superfluous to requirements no longer looks entirely fanciful.
All these phenomena are part of a post-crisis new economy; in themselves, they are very healthy developments, but they are quite negative for many of the old assumptions.
There is no great pent-up wall of corporate investment just waiting for the flood gates to be opened, just as governments can no longer rely on the candyfloss tax revenues of finance to underpin their spending commitments. Much of the growth in productive activity that is taking place, for instance in the digital and black economies, is not caught by the tax system at all.
Not until governments grasp the nettle of serious entitlement and supply-side reform will they lift their economies out of this funk.
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Jeremy Warner
In Finance »
Top 10 coolest offices in the UK
Autumn Statement: family tax bombshell over new black hole
Debt crisis: live
In Jeremy Warner
Why would Scotland turn itself into Greece?
The euro is heading for a permanent state of depression
Debt crisis: live
|
|
|
|
|
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zii000
8 minutes ago
Ah yes Tim Morgan you quote. This is the very same Tim Morgan who I emailed a few months back to point out his complete misunderstanding of the term 'external debt' in one of his funded-by-who-only-knows reports. This report was passed around our office in Luxembourg and there was a general consensus that it was more propaganda than fact. He didn't reply of course.
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donkeylogic
Today 06:18 PM
"Conventional Keynesian analysis.."
Dear Lord
... anyway :
"It’s perfectly true that companies have been steadily building up their cash reserves. Many have also been paying down debt. But these trends pre-date the crisis by some years"
True enough - but they really do have cash sitting about.
And they will invest
But I doubt the majority of that investment will be in UK
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sweetness_light
Today 05:59 PM
Please tell me how effective the most massive cuts in public spending since the 1920s have been? Has the deficit shrunk ? Or is it larger than last year? Have we got a rising or falling living standards? Are there 5 million people looking for work? Is the economy growing or shrinking? Is inflation falling or shrinking? Is private sector dent falling?
Please tell me any measure at all in which the current chancellors idiotic policies are working except for Tory party milionaire donors?
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tom197482
29 minutes ago
You're fooling yourself if you think this is austerity. It is the last-gasp of socialist spending.
Whoever gets in at the next election will be forced into spending cuts that will make the current austerity look timid.
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Goodgulf_the_Grey
33 minutes ago
The whole basis of your question is the opposite of the truth. Public spending is increasing year after year.
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sweetness_light
Today 05:42 PM
Sighs deeply-
http://www.3spoken.co.uk/2011/...
Sectorial balances. Private sector surplus (plus balance of payments ) has been equal to public sector deficit for 300 YEARS ALWAYS and in every economy looked at (us, Italy, uk, Germany, Japan etc). ALWAYS!!
It's not mysterious and Jeremy is bring silly
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SandySure
Today 06:28 PM
sweetness_light
It is just an accounting identity. It has been that way for ever, in every country (even if no-one did the accounting).
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sweetness_light
56 minutes ago
Yes - as long as money is created as debt by private banks there is no way out of its arithmetic.
It also explains utterly why austerity leads to higher deficits and lower growth.
You will know when the economy will grow when private sector reverses deleveraging from the sectorial balance graphs.
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SandySure
51 minutes ago
sweetness_light
"Yes - as long as money is created as debt by private banks there is no way out of its arithmetic."
Sweet FA to do with it. Do the accounting in bananas it will still be true.
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sweetness_light
14 minutes ago
Nope. £375 billion of govt debt has been bought up using qe (credit creation by a central bank). If that oustanding debt is retired then government deficit is reduced (at least by £40 billion per year interest). That alters the accounting relationship and allows government deficit to be reduced without a corresponding drop in private sector surpluses.
The liquidity trap allows a way out of this
Mess if we will take it. It involves cancelling debt which changes the game.
See the us, Japanese and uk governments doing this in the 30s and the uk givernment doing it in the 40s. The us givernment has done this on and off using the fed for 40 years. Prime minister abe in Japan promises to cancel Japanese debt in the near future. The bank of England rolled over (cancelled) the first £6.6 billion of uk debt two weeks ago
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SandySure
6 minutes ago
Sweet FA to do with it. Do the accounting in bananas it will still be true.
If G's deficit is reduced either it borrows less or taxes less.
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JamesPotkins
Today 05:38 PM
This is just the start of it. No Party will ever choose to cut back state expenditure, as it will be political suicide. Therefore no serious cuts will be made and when the choice is taken out of politicians hands the pain will be tremendous. It is political cowardice that has led us to this point, and cowardice that will see the UK collapse.
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jacqui
Today 05:12 PM
Yes, isn't this how formal banking begins? a gathering of money in one place which confers a power to the organization that controls it.
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maxwade
Today 04:49 PM
Jeremy
As a large corporation you can accumulate cash balances quite easily when you...
(a) Offshore as much as you can to exploit far cheaper overseas labour costs.
(b) Charge consumers in the UK as much as you can get away with.
(c) Operate in a UK market that has nor readily enforced malpractice watchdogs because the bodies entrusted to oversee everything from burger contents to banking are utterly incompetent.
(d) Pay little or no tax.
(e) Are audited by wholly untrustworthy and largely unaccountable auditors.
Then, having amassed your cash pile why would you want to re invest it in the broken economy that you leave behind ?
Its cowboy capitalism of the finest order and I am astonished that so few people cannot see it as anything other than that.
(Edited by author 2 hours ago)
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SandySure
57 minutes ago
maxwade
How can businesses charge consumers a lot, if the consumers don't get decent wages?
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carlp
Today 04:00 PM
Post crisis? Surely it is an ongoing crisis.
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