Canadian Finance Minister urges corporations to invest ‘dead money’ into economy

This summer, Bank of Canada governor Mark Carney accused Canadian corporations of sitting on $526 billion worth of “dead money.”  Carney as well as Finance Minister Jim Flaherty said at the time that the companies should either give the money back to shareholders through dividends or apply cash stockpiles to work.

Earlier this month, after a prominent bank analyst criticized Carney and noted that there is insufficient evidence to support his claim; Carney reiterated his sentiments during a central bank press conference in Calgary, Alberta.

“It is true that firms have increased their holdings of cash, but calling all of it dead money is overstated,” wrote TD Bank chief economist Craig Alexander in a note to clients.  “The simple truth is that, at the economy-wide level, businesses under-invested prior to the recession and they cannot let the prevailing risks paralyze them from investing in the coming quarters. They have to build for the future.”

In a speech Tuesday in Ottawa, the Canadian finance minister urged companies, once again, to put some of that $500 billion or so into action and invest those funds into the economy and create jobs.  He explained that Prime Minister Stephen Harper’s Conservative government has opened trading markets to Asia and lowered both income and corporate taxes and now it’s time for the private sector to act.

“Our country’s long-term prosperity is linked to reaching beyond our borders for economic opportunities that serve to grow Canada’s trade and investment,” said Flaherty in prepared remarks to Canadian Council of Chief Executives.  “Our government cannot do this alone.  Private-sector business investment must also help lay the foundation for a sustained, long-run expansion of Canada’s economy and job growth.”

The Tory minister also stated there are two growing international risks to both the global economy and the nation’s fiscal position: the sovereign debt and banking crisis in Europe and the United States economy, which he says is facing a “fiscal cliff” in the next few months over discourse towards budget cuts and tax hikes.

Meanwhile, John Manley, president of the Canadian Council of Chief Executives, differed on the government’s and the central bank’s analysis.  Manley stated that businesses are doing a lot of investment in the country’s economy and capital investment will actually eclipse that of the stimulus put forward by all of the provinces and the federal government combined over the next few years.

“I think we heard Mr. Flaherty point out very clearly that there are two major financial risks in the world today, one in Europe, one in the United States,” said Manley.  “So I don’t think he or Mr. Carney would find it surprising that companies would be trying to retain a little cushion of insurance in terms of cash on their balance sheets when you really don’t know what the next couple of months is going to bring.”

Since the beginning of the recession in 2008, the federal government as well as the provincial governments have attempted to stimulate the economy, but data suggests that the economy has remained stagnant.

The federal government’s Economic Action Plan was designed to have the government invest in different sectors of the economy in order to spur growth.  Some of the latest projects include the federal government building a longer airport runway in Deer Lake, Newfoundland and Labrador ($3 million), the construction of a cruise ship terminal in Nanaimo, British Columbia ($22 million) and the creation of the Yukon Green Energy Legacy project in the Yukon ($71 million).

Despite all of this government investment and intervention in the economy, the unemployment rate in Canada stands at 7.2 percent, the budget deficit remains at around $31 billion and the national debt has risen close to $600 billion.

Many financial experts have argued against government stimulus.  In the United States, Peter Schiff, president and CEO of Euro Pacific Capital, has stated in the past that the best measure to stimulate the economy is for government to get out of the way and just lower taxes, decrease regulation and stop making it harder for businesses to both establish and operate.

However, there are other finance gurus who say there needs to be even more economic stimulus, such as economist and New York Times writer Paul Krugman.  He argues that in the U.S., for example, President Barack Obama needs to spend an additional $2 trillion in stimulus and the Federal Reserve needs to have even further Quantitative Easing.

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