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Accountability for “Idle” Cheap Debt

| Friday October 8th, 2010 | 2 Comments

Corporations are obtaining cheap debt, yet such easy money is not spurring the economy.  Rather companies are stashing their borrowings, rather than spending them.  Money is allegedly sitting unproductive rather than going towards job creation.  Are corporations to be held accountable for such (in)actions?

Borrowing and Holding Capital is not Saving Capital
Before we answer this questions, it is important to acknowledge an important nuance.  There is a huge difference between saving capital, and borrowing and holding capital.  Savings comes from providing goods and/or services at a profit, and thus storing a proportion of that profit. This argument revolves around borrowing and holding capital, in other words obtaining debt, cheap debt.

The nuance between saving versus borrowing and holding is important because the former is earned, and the latter usually needs to be payed back with interest.  There is no repayment necessary, per se, with savings.

Intentions of Job Creation not Met
With such cheap money available, the expectation was that companies would spend and invest money thereby creating jobs.  What is actually happening is companies are borrowing to hold money since it is so cheap.  Microsoft has over $36.8 billion in cash, yet recently obtained debt of $6 billion.   Also, companies borrowed money not to spend on jobs, but on acquisitions.  Dell, which already has a savings of $12.4 billion, is obtained money through cheap debt, for a potential acquisition.  Suffice it to say, the intention of job creation was not met.

The Root Culprit of Cheap Debt
Are corporations to be held accountable for such actions?  Let us implore a bit of systems thinking into answering this question.  Systems thinking is key for sustainability, it is the process of understanding how things influence each other as a whole.  We need to be able to see the forest for the trees.  We need to look at the big picture to understand the process of easy borrowing from monetary policy.

Companies have hold large amounts of borrowed money because debt is cheap and easy to obtain.  How is debt cheap and easy to obtain?  This debt is cheap because interest rates are set artificially low. Interest rates are set low by the monetary policy of the Federal Reserve.   Monetary policy was set low in attempts to stimulate job growth.  (Whether or not monetary policy actually works or not is another question.)

It is inappropriate to assign blame to corporations for borrowing and holding money, let alone their choices of use or “idleness” of the borrowed money.  If rates were never set artificially low in the first place, corporations would be less inclined to obtain debt.  If anything, the root culprit of the alleged un-productiveness of cheap debt is the monetary policy of the Federal Reserve.


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  • http://www.sustainable-path.com Roland Van der Meer

    I think this idea of cheap borrowing does indeed point to accountability on the part of borrowers not stimulating jobs, but it also points to a “miss” in opportunity. The opportunity in front of corporations and investors is to lead the market in newer, more sustainable technology and innovation, which will in turn produce greater returns on all fronts – create more jobs, create new markets, secure a profitable and market leading position in the new sustainable economy, and help get the US on track to lead the green economy.

    • http://www.jonathanmariano.com Jonathan Mariano

      Hi RVDM,

      I think the marketplace is the best place for sustainable technology and innovation to flourish.

      On the flip side, I do not think artificial interest rates of the Fed can actually do it. Genuine savings and investment needs to take place. Having the Fed lower rates only serves to provide money and price inflation.

      Once we can stop the Fed from toying with the money supply is when we will truly be on the road to a sustainable economy. Sustainable for the planet, but also sustainable for the economy itself.

      J++