Apparently British companies’ cash holding stood at a record of £731 billion at the end of 2011. Put it in another way, the UK corporate sector has more than enough liquidity or cash to service the entire financing needs of all British small companies.
There is now a new initiative with another government commissioned report to get the money from a big company to be lent to smaller companies (direct or indirectly). But I am not getting this. Surely this cash is not held in those companies’ basement vaults or under their chief executives’ mattresses. Surely this cash is held in British bank accounts. In other words the banks can use the cash in their ordinary course of business, like any other deposits. So what are they doing with this cash? I still have the suspicion that rather than using this liquidity to fund small businesses it is used to buy Government bonds which appears to be a more attractive proposition for most lenders. Could this situation be an “unintended consequence” of the quantitative easing programme?
One of the solutions suggested is that big companies should pay their smaller suppliers faster. I agree that this will help but I don’t think that this is the wonder pill. I think there are two conditions which have to be met for economic activity to improve. Firstly, businesses needs to believe that investment is an attractive alternative (even the big ones – can you imagine how the economy would benefit if all that cash was invested in the UK). Secondly, businesses need access to sensible finance (sensible in the sense that sensible expectations of the borrower are met by sensible terms offered by a lender).