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September 24, 2008
An illustration of how the financial crisis affects the real economy.
The Financial Times reports that corporations are stockpiling cash and short term securities:
"Excluding utilities and financial institutions, members of the Standard & Poor's 500 Index ended June with a record $648bn in cash and short-term securities."
This is being done to provide a measure of security against the financial crisis as well as a worsening economy. As credit markets remain troubled the cost of borrowing is increasing and firms that rely upon credit to do their business find themselves on increasingly unstable footing in the face of weakening consumer demand-consider the retailer Talbots:
"One US clothing chain, Talbots, has already faced challenges. In April its shares plunged after Bank of America and HSBC did not renew $265m in credit lines. Talbots eventually won extended credit terms from the majority of its suppliers, while covering its remaining credit requirements with a $50m facility extended by its largest shareholder, Aeon, the Japanese retailer. "In a period in which credit is being rationed, the price of leveraged assets declines and cash is king," Mr Trennert said."
If a firm can't get a credit lifeline, a bankruptcy may follow and that would end up shrinking payrolls and forcing yet more consumers to cut back their spending.
--Mark Price
Posted by Price at September 24, 2008 12:23 PM