In yesterday’s post we noted that working capital has bounced back in Europe and that Europe’s biggest companies have seen the most significant revenue growth in five years. We also noted that, at the same time, these same companies are hoarding their cash and, in many cases, borrowing to do so, while smaller companies remain starved for capital and unemployment remains near 10% in the EU. And SI stated that this is, in its view, disgusting. A lack of jobs is resulting in significantly reduced spending across the board because the people out of work can’t spend while the rest of the people are fearing that they are next on the chopping block given that it’s been all bad news in the job market for a few years now. This reduced spending has significantly contributed to the global economic decline which has brought entire countries to the brink of defaulting on their (sovereign) debt.
Now, as per this recent article over on BNet on how bad corporate management is killing the economy, we find out, from a recent study by CFO Magazine and REL (a division of The Hackett Group), the thousand largest companies in the US are sitting on cash reserves of 853 Billion. Given the relative equality between the power, and cash position, of US and European multinationals these days, it’s probably a safe bet to say that the Global 2000 is probably sitting on 1.5 Trillion in cash reserves. Now, while it may be true that this is likely not enough to solve the economic crises of the world, given that the US National Debt is almost 15 Trillion, we have to remember that there are only 11 countries in the world with a GDP greater than 1.5 Trillion. We also have to remember that the national average wage in the US is slightly under 41 K, and that this means that these companies could collectively employ another 36.5M people for one year without going into debt. To put this in perspective, at the current published unemployment rates, there are only 27.9 M unemployed people in the US and 46.8 M unemployed people in the EU. That means half of the unemployed people could be working at the top 2,000 corporations in the US and the EU. This would give effective unemployment rates of 4.5 and 4.8 in the US and the EU. The last time the unemployment rate dropped below 4.6 in the US was back in 2000, and the economy was booming.
So while it’s not an absolute that corporations can fix the economy, it should be pretty clear that the author is right and that big corporations are killing the economy when they could be the economic saviours. Instead of hoarding cash, they should be focussed on innovation and hiring bodies to propel that innovation forward. That’s how you print money in a knowledge economy, and with the current state of affairs in most public sectors and banks around the world, they are the only organization left with a license to print cash. But they have to be willing to use it.