Please sir, would you spend a bit more? Governments are behaving like upside down Oliver Twists, urging consumers to max out their credit cards in the hope that a shopping frenzy might banish the deflationary ghouls that are stalking global markets. It's a bit desperate because consumers still don't feel rich; wages are stagnant and householders are mortgaged up to the eyeballs. Instead of targeting consumer wallets, governments need to look at corporate cash piles; the money is still piling up and it needs to be invested.
On the fringe of the euro zone, which has just fallen into negative inflation, Britain looks in relatively good shape with seven consecutive quarterly increases in GDP. Unemployment continues to fall but the average wage earner has only in the last quarter begun to see a marginal increase in his pay after discounting inflation, a meagre 1 per cent in November. Even less impressive is the rate of business investment: negative-1.6 per cent in the last quarter. While construction and household spending is rising, firms are putting less money back into their underlying businesses.
Around the world, the corporate sector is hoarding cash. The money pile of the 100 largest quoted companies in the U.K. was £54-billion ($96-billion) in October, according to figures collated by Capita Asset Services, an increase of 41 per cent over the previous year. It seems that firms would rather pay back debt than invest in new business opportunity or even pay extra dividends to their shareholders. It is hardly a resounding vote of confidence in the global economic outlook.
The glum mood in the boardroom is most noticeable in the resources sector, a major component of the FTSE-100 where oil and mining companies are in frantic cash-generation mode, selling assets and repaying debt in response to falling commodity prices. Oddly, however, consumer manufacturers are behaving in similar fashion, reducing short and long-term debt. The cash hoarded in overseas tax havens by U.S. multinationals is legendary and is now becoming a hot political potato. Estimated by Moody's to be worth about $1-trillion (U.S.), it is rising rapidly owing to the disinclination of big corporates such as Apple and GE to subject their foreign-earned profits to the relatively high rate of U.S. corporate tax.
The antics of U.S. companies seeking to reverse their nationality into that of foreign takeover targets to preserve their untaxed profits has not endeared them in Washington. However, past efforts by the U.S. government to lure the money back home with a tax holiday did not lead to an investment boom and job creation. Corporate treasurers chose to spend the cash buying back the company's stock, thereby boosting the value of executive share options and bonuses.
The tumbling oil price is finally putting a bit more back into people's pockets but it is also fuelling popular expectations of "it will be cheaper tomorrow." Retailers are desperate to grab the loose change in people's pockets and last November, for the first time, the U.K. copied America's Black Friday seasonal sales gimmick. But for many stores, the experience was not rosy and a leading department store, John Lewis, complained it simply took cash out of Christmas shopping at lower margins. British food retailers have started a war of attrition, slashing prices to protect market share from a low-price onslaught from the new German competitors, Aldi and Lidl. Adding fuel to the price bonfire, the British government gave warning this week that it was watching corporates to ensure that oil price collapse was passed on, not just at the gas pump, but by utilities, airlines and in the wider economy.
Still, we know from the experience of Japan that spending doesn't always expand as prices contract. Without the expectation of rising incomes, the impetus to buy is held in check by an obsession with debt repayment. If the world is to avoid a damaging rush toward saving by anxious consumers and miserly corporates, governments need to do more than just print money and pray that oil stays cheap.
We need to find a way to prise the cash hoards out of the hands of corporate treasurers and give them the confidence to build, invest and innovate. The employment expansion of the past year has been largely infill, the replacement of jobs lost in recession, often at lower wages, fuelling the low expectations of consumers who no longer believe that tomorrow will bring greater prosperity. It is the job of the corporate sector to restore that prosperity and create new businesses out of the new energy, medical, automotive and industrial technologies that are already in the pipeline. If corporates persist in hoarding or buying back stock to flatter share prices, governments may need to find ways of forcibly recycling capital. Taxation is a blunt tool that only indulges government expansionist tendencies but penal negative interest rates on money hoards could be an alternative.