Economists question Carney's 'dead money' solutions

August 24, 2012

What should be done with that spare $526-billion that Canadian companies have kicking around? That is the question some economists have batted about since a frustrated Mark Carney, the Bank of Canada Governor, made his comments about "dead money" in the collective bank accounts of the country's businesses on Wednesday.

Start taking some investment risks, Carney suggested, or send those piles of cash you're keeping warm back to investors in the form of dividends.

Stéfane Marion, chief economist and strategist at National Bank Financial Markets, looked closely at this second idea -- upping dividends -- after admitting that liquid assets were at record highs. But his findings indicate these payments might not be the best way to go. "Mutual fund data show that the percentage of dividend payment that is reinvested has swelled to 85 per cent," he wrote in a Hot Charts note Thursday evening. That's 25 per cent higher than the numbers charted during the early 1990s.

Mr. Marion chalks this one up to cyclical factors such as low risk appetite and investors tucking more away for retirement. "At the end of the day, the firepower of higher dividend payments on the real economy may not be all that large," he concludes.

So if dividends aren't the answer, what about making more investments? In a note from BMO Capital Markets, senior economist Sal Guatieri challenges this idea by looking at Canadian companies' national investment in nonresidential structures and equipment. He charted the results, and found that spending is increasing at "a pretty good clip" despite the economic uncertainties swirling around Europe, the U.S. and now China.

Mr. Guatieri found investments in this area increased by 6.3 per cent in the first quarter, compared to last year indicating a full recovery from the recession. "True, it took four years to accomplish this feat," he concedes, "but that's two to three years earlier than in the past two recoveries."

And it seems that Canadian companies are inclined to agree. Globe and Mail reporters Carrie Tait and Iain Marlow interviewed some firms with fat bank accounts, and while none of them expressly said they had cash earmarked for construction or equipment, their reasons to keep the money close included R&D, paying down debts, restructuring their business and softening the blow of rising materials costs. Those strategic plans may prove too tough for Mr. Carney to dispute. 


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