Corps. Gobbling Up Cheap Debt Instead Of Hiring

You can’t get a loan but Microsoft sure can, and it’s taking advantage of uber-low interest rates to raise billions by selling bonds. Why? “Because they can,” writes NYT. They’re not alone, across the board companies are plumping up their cash reserves so they can take advantage when the economy turns around, but it’s unlikely to anytime soon if companies keep saving instead of creating jobs. What came first, the chicken or the nest egg?

Cheap Debt for Corporations Fails to Spur Economy [NYT via Slate]

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  1. humphrmi says:

    Making money by borrowing to save is a myth. Eventually they will have to spend it, or pay it back at a loss. We’re not happy because they aren’t spending it *now*, and it is a chicken-and-egg thing, but eventually all that money will have to be re-injected into the economy.

    • thompson says:

      Though you can make money by borrowing at lower rates (now) than at higher rates later. This is especially true if we hit a liquidity crunch again, which is what these companies are hedging against.

    • TuxthePenguin says:

      If you can borrow at a cheaper rate now than in the future, and the cost of holding that money until you need it is less than the difference in the higher interest rates, you borrow now. I have an example posted (twice) below.

      If you can borrow below your estimate for inflation going forward (typically begged at 3%), that means you’re actually going to make money in real-dollars over the course of the bond. If I can borrow at 2% and inflation turns out to be 5%… I’m making money.

      • TouchMyMonkey says:

        I just did a refi at 4.25%. We will never see 4.25% again in our lifetimes. I also just bought a new car at 3.75%, financing through the credit union, not the dealer. If money is this cheap, why not borrow what you can?

    • nonsane says:

      What does Microsoft know about making money anyways ;)

    • Fineous K. Douchenstein says:

      You sir are strongly incorrect. If you are borrowing at a lower rate than your savings earns you, then you’ve made money by borrowing. That is why you could pull off making money on credit cards that had 0% money transfers for the first X months of the life of the card. Take as much money as you can at 0% interest, put it into a high interest CD (At the time this was popular, most CD’s paid out 5% or more) and when the CD matured, you pay off the card and keep the extra.

      Sure you paid some taxes on what you gained, but it was literally FREE money on someone else’s dime.

    • Daemon Xar says:

      But not until Republicans take control of the House and Senate, so that people who aren’t paying attention continue to buy trickle-down (voodoo) economics.

  2. Eat The Rich -They are fat and succulent says:

    Thing is, people forget that the mandate of the corporation is to be profitable. Not provide jobs. They do with as few people as they can get away with and do anything they can to improve profitability. That is their function. Corporations don’t owe jobs to the economy and they know it.

    • Destron says:

      Only problem with that is, if companies are not creating jobs, then nobody has any money to buy anything, so eventually it comes full circle.

      In the case of Microsoft, if I am jobless, and don’t see that changing in the foreseeable future, then I am not buying a new PC, which in turn will cause PC manufacturers to scale back, and will eventually end in hurt for Microsoft because they don’t need to buy as much from them. I am also not going to upgrading my OS, replacing hardware, or buying any video games while i need to buy food or pay bills, hell, in a worse case scenario ill be selling that stuff off to pay the bills.

      • Scuba Steve says:

        If no one has any money, then the companies will simply ask for a bailout. Then use that money to take over other companies.

    • Beeker26 says:

      Which is why it’s been shown time and time again that trickle-down economics simply doesn’t work. Companies are more likely to pocket any gains, not spend them.

      • TuxthePenguin says:

        You’re confusing Trickle-Down economics with corporate finance.

        The reason companies are borrowing all this (cheap) money is that they know in the future it won’t be this cheap. Assume you put out a bond at 5% repayable in ten years, figuring you’ll expand in two years. You’ll be sitting on the money for two years, so you’ll pay $10 per hundred. Over the course of the “used” time, you’ll pay $40 per hundred borrowed. But if you expect interest rates to rise to 7%, to finance that growth over the same seven year period if $56 per hundred borrowed. By borrowing now and locking in the low borrowing rate, you’ve saved yourself $6 over the course of that 7 years you actually need the money. That’s assuming you retire the bonds early as soon as the need is gone (at eight years). If you can’t, you’ve now spent $14 more dollars per hundred because you delayed.

        Its simply corporate finance. Nothing to do with Trickle-Down economics…

    • runswithscissors says:

      The problem is not their ruthless persuit of profits, the problem is that they seem to constantly put short-term gains ahead of long term growth and stability.

      Building a talented workforce and working on projects for the future are long term goals and growth. They not only don’t add to “this quarter’s results” but rather detract from them. And the system is setup right now to only reward CEOs for short term results.

      So guess which they focus on? Screw the future, they gots to get paid $400 million TODAY.

      • dragonfire81 says:

        THANK YOU!

        Brilliantly put, this is exactly how I feel and have felt for a long time.

      • TuxthePenguin says:

        You do realize that the finance/accounting behind the decision to take on debt now is actually a long-term analysis rather than a short-term, right?

        Kind of pokes a hole in your argument that is otherwise very good.

        • runswithscissors says:

          Actually my little rant was more about Corporate mentality in general and not as much about this particular story. I was put in the mindset by the also-somewhat generalized comment I replied to.

  3. MustWarnOthers says:

    In before delusional neoconservative insists trickle-down economics works, despite years of proof to the contrary.

    • crazydavythe1st says:

      I’m normally with you, but in this case this is sure to eventually create jobs. In fact, boosting cash reserves is often a precursor to mass hirings – it still costs companies to take out loans, so they can’t sit on that cash, they have to use it on projects that will be more profitable than what it costs for them to take out those loans. Projects need people, and so it seems very likely that this will eventually net jobs.

      • hypnotik_jello says:

        The interest rate on the bonds is a nominal 0.8%. Inflation outpaces that so it’s not actually costing anything them anything to sit on the money.

      • MustWarnOthers says:

        What would entice the company to spend it on hiring, if nobody has any money to buy anything? Won’t it just be invested in some prospective market and be doled out to shareholders?

        • crazydavythe1st says:

          They could do that of course. They probably wouldn’t get the return that they would get investing on internal projects, however.

    • TuxthePenguin says:

      Learn to differentiate between economics and corporate finance.

      The reason companies are borrowing all this (cheap) money is that they know in the future it won’t be this cheap. Assume you put out a bond at 5% repayable in ten years, figuring you’ll expand in two years. You’ll be sitting on the money for two years, so you’ll pay $10 per hundred. Over the course of the “used” time, you’ll pay $40 per hundred borrowed. But if you expect interest rates to rise to 7%, to finance that growth over the same seven year period if $56 per hundred borrowed. By borrowing now and locking in the low borrowing rate, you’ve saved yourself $6 over the course of that 7 years you actually need the money. That’s assuming you retire the bonds early as soon as the need is gone (at eight years). If you can’t, you’ve now spent $14 more dollars per hundred because you delayed.

      Its simply corporate finance. Nothing to do with Trickle-Down economics…

      • MustWarnOthers says:

        My comment was pretty ignorant I must say. I apologize.

        I guess I just assume the worst from most Companies/Corporations. I assume that the gobbling up of extremely cheap debt isn’t to ensure the health of the corporation down the line, it’s to get ready to dump money into the next bubble before “all bets are off”.

  4. Cicadymn says:

    Private sector just cut another 39k jobs last September.

  5. 99 1/2 Days says:

    Who wants to hire when they never know what the current administration will do to them? I know several business owners who feel that way.

    • JustARandomThought says:

      Your comment makes no sense, why would a business not factor in a worse case scenario and uncertainty into their decisions? The mark is efficient isn’t it?

      Also, why would a business hire if there is no demand? And if there is demand and it is not being met why not take advantage of it?

      Businesses are not hiring because they do not expect a strong economy in the future. When demand goes up they will hire, then we are left with structural unemployment issues. Which is a whole other problem. Until then the answer is lack of demand.

      • ShruggingGalt says:

        Actually that comment is correct. The largest tax hike in recent memory is three months away. Everyone who pays taxes will see less of their paycheck unless something intervenes, but right now, taxes are going up.

        Add that to the increased cost of healthcare that can’t be passed to employees, etc. etc. and you’ll understand why companies are hoarding cash. They think they’ll need it next year and beyond.

        If cutting taxes is so bad, how come the economy usually improves and tax revenues actually go up?

        Trickle-up doesn’t work. Who hires people? Those making under $50k a year? I know at my company when the owners have to pay more in taxes that means less money for profit sharing to us “middle class” employees.

        • MrEvil says:

          Oh yeah, the Bush tax cuts worked out so well. [/sarcasm]

        • Fineous K. Douchenstein says:

          I love how the expiration of a tax-cut program is being called a TAX HIKE. Your taxes are still the same as before, you’re just seeing an ending of what amounted to a discount.

        • MustWarnOthers says:

          if your business/job is profitable, what difference is the tax increase really going to make on the employees?

          So your profit sharing is slightly less…then the owners can make that up in payroll, which is non-taxable?

          Trickle-up doesn’t work? The low and middle class are the most likely to spend additions to their take home pay.

        • JustARandomThought says:

          The models you are referring to in economics assume people plan for tax increases, so if you cut taxes now and did not cut spending people would just save it to pay future taxes, right?

          Cutting taxes reallocates to the private sector, ideally moving resources away from the government. Problem is we have idle resources, so the government is not crowding out the private sector so there is not allocation problem.

          Also if you are saying increased cost can not be passed on to employees, then you are contradicting your own economic logic. You would have to assume they would bear the whole cost.

          Companies are hoarding cash to protect themselves if things get worse. They are afraid because of lack of demand. Would you want to be a restaurant with no payroll tax and at 20% capacity or 80% capacity with a tax increase coming?

          Also, why can’t low income workers hire people. If they are putting money away to retire and invest it the result is more people employed just the same as a rich person. Okay so they might be only hiring 1/15th of a worker, but if the income was reallocated the result would be the same, no?

        • RvLeshrac says:

          Those who hire people hire exactly 0 people when no one can purchase their products. You think Microsoft is actually hiring thousands of workers when fewer and fewer people (and businesses) can purchase their products?

          Since the people who purchase the most are the ones who make the least, it sounds like giving them tax cuts is the way to go.

      • 99 1/2 Days says:

        Well, worst case scenario changed severely over the last two years.

    • RandomHookup says:

      Couldn’t the same be said about any risks of the market?

      • 99 1/2 Days says:

        Yeah, but socialists in office make it too risky to invest.

        • Conformist138 says:

          Thank you, you just proved yourself to be a moron. Anyone using fad hype words without even the slightest consideration of their meaning just shouldn’t be listened to. Show me these “Socialists” we have in office, cuz I can’t find them. If you are talking about the idea of public health care, then you must also be against public schools, libraries, and parks. Likewise, you should be all for getting rid of police forces or public roads. Seriously, tax money helps pay for services and amenities needed by most or all citizens. I fail to see the problem with that.

          And, I don’t know a single business that truly isn’t hiring just because they fear mean old Obama will strike them down. Most new rules affecting businesses don’t even take effect for years after bills go through (ie- a lot of the new health insurance reform).

          Any company saying they won’t hire just because the administration might do something to hurt them later is being highly disingenuous.

  6. TuxthePenguin says:

    http://finance.yahoo.com/bonds/composite_bond_rates

    An A-Rated (lowest investment grade rating) can borrow for ten years at 3.71 (although AA is higher… weird). AAA-Rate is below 3%.

    Inflation is typically estimated at 3% a year. That means an AAA-rated entity (like Microsoft) can borrow at a rate lower than inflation.

    • craptastico says:

      BBB is the lowest bank investment grade rating. i agree with the gist of your statement though. even BBB and A rated companies have been issuing 100 year bonds paying less than 6%. borrowing rates are so low companies can practically print money.

    • JustARandomThought says:

      Although the people buying bonds must not expect inflation to be so high, so 3% inflation seems like a high figure.

    • Bob says:

      But shareholders will not be OK with a corporation holding onto borrowed money for the long term just because the bonds are less than inflation. The corporations will have to spend some of that money. If they all do it at the same time that will create jobs and make the recovery a self-fulfilling prophesy. We just have to wait this mess out for another couple of years.

      • TuxthePenguin says:

        True, in the medium to long term. But if they can borrow at low rates now and hold onto it for two or three years, that will be cheaper than borrowing at the higher rates in the future (which there has to be, rates can’t get much lower and inflation will eventually come around)

  7. Blueskylaw says:

    Microsoft has BILLIONS of Dollars in cash profits held overseas, but if they brought it back to this country they would have to pay taxes on it (you know, the American thing to do) but since they don’t want to do that they raise additional cash here.

    • mac-phisto says:

      oh, don’t worry. when the MNCs want to repatriate they’ll just lobby for another tax break & hide it in another job bill.

  8. Donkey Hoti says:

    They’re not saving to be jerks. You can’t hire when you can’t calculate the cost of hiring.

    They’re saving cash because the business environment, including tax laws on capital gains, tax rates, the death tax, and also the skyrocketing costs of health care due to increasing govt interference are UNKNOWNS rights now.

    No, I’m not bashing one party. (For the record I think both parties suck.) I’m just stating a business reality that when you don’t know what your labor and tax costs will be next year, it’s tough to do anything but prepare with cash reserves.

    • JustARandomThought says:

      Why can’t they calculate the cost of hiring?

      They could just factor in the chances of taxes going up and the cost of the health care bill, adjust for available information. Also, why hire when demand is not there.

      • RandomHookup says:

        Correct. Otherwise, no one would every hire employees in India, because salaries have been rising unexpectedly fast in the tech sector.

      • TuxthePenguin says:

        He’s being a bit simplistic – its not that they can’t calculate the cost of hiring (when I do it for my clients, I push them toward worst case scenarios), its that when they do that calculation its not meeting their hurdle rates.

        Put it simply – if a new person could bring in $100k of business, but costs $70k, benefits, HR overhead and all, that means you net an additional $30k. Sounds great! Until you realize you lose 35% off the top (corporate income taxes). Now you’re at $19.5k. You get it into the owner’s hands, so they pay another 30%. We’re now talking about $12k extra in his pocket. That’s still a great deal.

        Unless you realize that there is a 40% chance of that, 30% chance its a break even, 30% chance you lose money on that new hire. You take your 12k x 40% plus the 30% chance of losing (say) 10k on the deal. By your estimate, you’re going to risk all that extra overhead for 1.8k, or a 2.5% ROI?

        Its a simplistic calculation (there are dozens of other variables that can be thrown in), but that’s the basics of it.

    • Mom says:

      No, actually it has nothing to do with calculating the cost of hiring. They can calculate the cost of hiring just fine. They’re saving because in the current business climate, they can make more money (or lose less, anyway) by pocketing the low interest loans than they can make by hiring people and making more stuff that nobody will buy.

      The math is complicated, but the bottom line isn’t.

  9. np206100 says:

    Microsoft should give their money away to hotmail users who forward emails to 10 of their friends!

  10. jake.valentine says:

    There is uncertainty and fear over just what the anti-business segment of society has up its sleeve next. You can’t demonize corporations/businesses and then wonder why they aren’t hiring. In Cali they continually raise taxes and fees, increase regulations, and then wonder why businesses are leaving the state. I don’t think the scenarios we see playing out in the business world are as complicated as we make them. Often we are creating excuses when the real answer is fairly obvious.

  11. jake.valentine says:

    There is uncertainty and fear over just what the anti-business segment of society has up its sleeve next. You can’t demonize corporations/businesses and then wonder why they aren’t hiring. In Cali they continually raise taxes and fees, increase regulations, and then wonder why businesses are leaving the state. I don’t think the scenarios we see playing out in the business world are as complicated as we make them. Often we are creating excuses when the real answer is fairly obvious.

    • RandomHookup says:

      Such as people aren’t spending as much money as in the past because they are worried about their economic future? Certainly businesses do get picked on, but there are reports of rising corporate profits in a time of flat (to dropping) individual incomes. Since governments have to get their money from somewhere, the target with the most money is going to get hit.

  12. bearymore says:

    It has everything to do with trickle down economics. The justification for the near zero interest rates from the Fed is that corporations will use the cheap money to invest and create jobs. Since one can assume that the governors of the Fed know something about corporate finance, then your argument proves what we’ve all known all along – monetary and tax policy has simply become a cynical mechanism to transfer huge amounts of public money to large corporations justified by a hypocritical appeal to trickle down or, worse, supply side “economics”.

    This is why the New Deal didn’t try to deal with the Great Depression through monetary policy and tax giveaways. It in principle does not work.

    • TuxthePenguin says:

      The justifications for the near-zero interest rates were to allow banks to lend money. Remember, they have to keep a certain reserve on hand per government regulations – what we’ll call their assets. Stupidly, many had them wrapped up in CDOs and other (now we know) risky assets. Those went boom… suddenly many were not sufficiently capitalized. In addition, they were freaked, so they stopped lending.

      And don’t speak of the New Deal. Most economists that are not Kensyians will say it was a failure. Even Krugman says what got us going again was the “Miracle of ’39” and WW2.

      • bearymore says:

        And why does the Fed want the banks to be able to lend according to its public pronouncements? To encourage consumption and business investment in order to —-> create jobs!

        As for the depression, Krugman never said Keynesianism didn’t work. He said the New Deal was insufficient to counter the depression. WWII was, speaking economically, the world’s biggest stimulus program and proved the efficacy of Keynesianism not its ineffectiveness.

  13. peebozi says:

    no shit, really?

    Easy Quiz: A publicly traded company an opportunity to make a $500,000,000 dollar profit killing 500 people (they’re suicide bombers from the middle east so calm down) knowing this will cost them $400,000,000 in damages, lost business, etc. What does the corporation do?

    i hope goldman is still receiving those 0% interest loans from the US taxpayer so they can reinvest in US taxpayer, guaranteed 2% yield bonds and walk away with a $20,000,000 profit that is paid for by the US taxpayer.

    profit above all else.

    • TuxthePenguin says:

      You’re example is a bit simplistic.

      But lets just keep it. They can spend $400 to kill these people. There is a 5% chance that they lose $200 and go bankrupt from the resulting moral outcry. There is a 10% chance they earn $200 after all the expenses due to unforeseen costs. There is a 25% chance of earning $400, breaking even. Then there is a 60% chance of making $500. Their estimated income weighted for all those results is $420k. That’s an ROI of 5%. If that’s above their hurdle rate and there are no other projects with a great nominal or % return, they MIGHT do it. Nothing is 100%.

  14. code65536 says:

    *sighs* This is why my temper boils every time I hear someone talk about the “failed” stimulus. The theory put forth by conservatives, essentially, is that there is insufficient capital, that companies can’t hire, can’t expand, because they can’t afford to. The theory put forth by Keynesians is that there is insufficient demand, and nobody wants to hire or expand if nobody is going to buy the extra production.

    And it is depressing to no end to see the conservative camp “winning” this argument and to hear more and more spineless Democrats (including that idiot we have for a President) toting the conservative line. Yes, early in the crisis, 2 years ago, when there was a credit crunch, the problem was indeed one of dried-up capital, but after the Fed enacted their emergency measures, that’s not the case any more.

    ECONOMICS IS A SCIENCE, and as any science, claims must be backed by EVIDENCE. So what does the evidence suggest? If the conservatives are right, and this is a problem of insufficient capital, then we should be seeing production not keeping up with demand. We should see shortages. We should see inflation. Basically, we should see something akin to the old Soviet bloc, with empty store shelves and people not being able to find what they want. If the Keynesians are right, and this is a demand-slack recession, we should see deflationary pressures (check!), people cutting back on consumption not because they can’t find the product on sale, but because they can’t afford it (check!), and we should be seeing a lot of idle capital (companies nervously sitting on cash reserves? check! factories that are idle and non-productive? check! workers who can’t find a job and thus are wasting their human capital? check!). *ALL* the EVIDENCE suggests that this is not a Soviet-style capital supply problem, yet all the conservatives are pushing for measures designed to cure a capital supply problem. *ALL* the EVIDENCE suggests that this is a Depression-style demand-slack problem, yet the stimulus, which is supposed to bolster the slackened demand, is being ridiculed as counterproductive (when in reality, the majority of economists have argued that the problem with the stimulus was that it was too small).

    Economics is a science, and we should be acting on evidence. But politics is about ideology, and our current reliance on blind faith with a wanton disregard for science is putting us on the path to hell… in a handbasket.