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Cash Grabs Hold Of Management

The Economist

The Tampa Tribune

Published: November 29, 2008

Seldom has corporate strategy been turned on its head so quickly. Barely a year ago, cash was a dangerous thing to accumulate: activist investors stalked companies, urging boards to return it to investors, to pay special dividends or to buy back shares.

Ever since the 1980s the fashion had been to make companies as lean as possible, outsourcing all but your core competencies, expanding your just-in-time supplier system around the globe, loading up with debt to "leverage" your balance sheet.

No longer. For many big American companies, the day of reckoning came two months ago when the deepening financial crisis brought about the abrupt closure of the overnight commercial-paper market.

Since then, the guiding principle for managers everywhere has been to gather whatever cash they can find, and then do their best to keep as much of it as possible for as long as possible.

This cash squeeze is a huge problem for the world economy, because as firms cut discretionary spending wherever they can, the result is likely to be a corporate version of what John Maynard Keynes called the "paradox of thrift."

Every firm does what is prudent for itself, but by cutting its spending it further slows down the economy and thus hurts everybody. This will only reinforce the need for expansionary monetary and fiscal policy to boost demand; and also for more direct support in credit markets, such as the Federal Reserve's prop for the commercial-paper market.

What was once seen as evidence of corporate fitness for the moment looks like anorexia. More padding - in the form of cash in the bank - will be necessary to secure a clean bill of health.

Likewise, ultra-lean supply chains no longer look like such a brilliant idea when you have to find cash to keep afloat a supplier that cannot get even basic trade credit. "Just in time" is giving way to "just in case."

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