The government-ordered shutdown of the economy is playing havoc with corporate balance sheets, pushing many companies to the edge of bankruptcy. Which makes it a good time to revisit former Bank of Canada governor Mark Carney’s 2012 denunciation of corporate savings as “dead money” that would be better spent than saved. Carney made his incendiary and largely baseless comments playing to a crowd of autoworkers. Despite his attempt to recant by soon after declaring dead money “resurrected,” the idea that a lack of corporate spending was undermining growth became a standard part of the left’s post-2008 narrative.
Today, those companies that conserved cash — the “dead money” that Carney demonized and critics of capitalism continue to condemn — suddenly look prescient. Of course, the very concept of dead money was always silly: firms were buying life-preserving financial stability with whatever cash they could conserve, cash being a precious asset in a consistently turbulent world.
Companies that a short while ago appeared to be in pristine condition teeter today on the brink of bankruptcy, squeezed between large debt taken on at tantalizingly low interest rates and a sudden and often startling drop in revenue. Chesapeake Energy, which helped drive the fracking revolution, could not support $7 billion of debt. Cirque du Soleil folded under the weight of $900 million of debt from too rapid growth, the sort of reckless expansion applauded by critics of dead money. Bombardier, which in 2013 had to defend its $3 billion of cash reserves, today needs a government bailout because of its US$6.5-billion ($8.8-billion) debt load. Myriad companies in the accommodation, food and travel industries will soon be in the same boat.
Companies understand why the original conception of dead money by the Spanish writer Federico Garcia Lorca referred to how in the 1929 stock market crash investors “lost several million dollars, a rabble of dead money that went sliding off into the sea.” Dead money referred to money lost in a volatile and uncertain world, not to surplus funds supposedly sitting idly on the sidelines.
Companies that over the last few years accumulated cash reserves, notably in the notoriously cyclical finance and resource sectors, were not specifically worried about a coming pandemic. What they did foresee was that today’s world is full of unexpected shocks — black swans, in the famous phrase of Nicholas Taleb — that are not predictable individually but are devastating in their impact. It was only to be expected that another shock would materialize in our globally integrated economy, where black swan events happen routinely. Recent examples include the high-tech boom and bust at the turn of the century, the Sept. 11 terrorist attacks, the Great Financial Crisis, Brexit, the election of U.S. President Donald Trump and now the coronavirus pandemic.
A couple of years ago, the OECD raised “a risk puzzle: why do so many people managing listed companies that carry out a large portion of the world’s capital formation see so much risk on the horizon while so many players in financial markets apparently see so little risk? Someone will inevitably be proved wrong.” In the OECD’s view, hoarding cash was a prudent response to the underlying risks in the global economy.
Today we know that not even cautious firms fully appreciated the extent of uncertainty in the modern global economy. Many companies now wish they had built up even larger financial reserves.
The innate folly of the concept of “dead money” in light of the 2020 pandemic might help explain why Carney, once lauded as “the best central banker in the world” is now a special United Nations envoy on climate change and finance. Carney would not be the first central banker to see a once-stellar reputation dulled as circumstances changed. John McCain, the Republican presidential nominee in 2008, once described former federal reserve chair Alan Greenspan as so indispensable that if John McCain were president and Greenspan died, he would prop him up with sunglasses on and pretend nothing had happened. Just months later, however, Greenspan fell out of favour after the Great Financial Crisis revealed severe shortcomings in Fed regulation of the banking system on his watch.
The best way for Carney to restore lustre to his brand would be to use his current quiet time to read and reflect on the black swan’s implications for the idea of dead money. When the international speaking circuit reopens — whenever that is — he could counsel others not to repeat his mistake of advising corporations not to worry so much about their balance sheets. It might be the best contribution he could make to the recovery of corporate Canada.
Philip Cross is a senior fellow at the Macdonald-Laurier Institute.