As the stock market remains choppy, I’ve chosen to shift some money into certificates of deposit.*(CDs) Interest rates for this kind of investment are low, but so is inflation. With a 2% return, I can keep my finances afloat. Recently, my broker recommended I add U. S. Treasuries to the mix. Treasuries, he said, were more liquid than CDs. “But, of course,” he added, “they aren’t insured.”
“What do you mean, ‘they aren’t insured?’”
The alarm in my voice must have registered at a high decibel because he laughed.
“Think about it, Caroline. The government never runs out of money. It prints what it needs.”
Unfortunately, corporations can’t do the same. So, why have they chosen this moment to increase borrowing? What’s driving the trend?
According to an article in Bloomberg Businessweek, the answer is simple. Corporate America can’t resist low-cost loans. (“Borrowing Billions To Buy Stock, Not Invest,” by Ben Holland et al, August 12, 2019, pgs. 28-30) Writer Ben Holland admits when a company takes on debt, that isn’t always a negative. Businesses take advantage of low rates to buy new machinery, purchase another company, or merge with a competitor. In leaner times, they can sell these assets to stay solvent.
Today’s borrowing seems driven for less productive reasons. Tempted by cheap money, companies use the debt to enhance shareholder value. They do so in one of two ways. Either they increase dividends, signaling the enterprise has a bright future. Or, they buy back shares. For a time, fewer stocks on the market can raise their value.
Both strategies are like icing on a cake. Sweet but without substance. Neither strategy increases a company’s bottom line. What’s more dividends and buybacks don’t put money in a worker’s pocket so they can buy more goods and stimulate the economy.
Under Donald Trump’s watch, we’ve witnessed a lot of icing. The question is, where’s the cake? For the moment, my instinct is to be a lender and not a borrower.
*Nothing in this blog is to be taken as financial advice