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Money or Material?

May 17, 2011

It’s my day for economics, apparently.  Another of my favorite economists, Greg Mankiw, has an interesting post on Google.  The origianl article is in the Wall St. Journal today.

Google Inc. sits on $37 billion in cash. But Monday it sold its first bonds, some $3 billion worth, to take advantage of corporate interest rates that are moving swiftly lower.

Tech companies have typically avoided debt offerings, choosing to fund operations from cash. But Monday’s deal was simply too good to miss, said David Trahan, a banker at Citigroup who helped lead the deal. “Everyone thinks that before too long, rates will go up.”

As the article notes, demand was pretty high for the bonds.  They could have sold more.  The article notes that this could easily help Google fund “cash” acquisitions, and that the bonds are yielding slighly higher than comparative US Treasuries.  So Google is essentially taking advantage of some really low interest rates to get near-term cash on the assumption that they’ll be growing in the future to pay it back.  And honestly, what could go wrong that Google would be forced to default?

Mankiw, after actually looking at the yield rates and saying that it’s actually not a good time to float short-term, notes:

Maybe this time is different, and past empirical regularities will not hold going forward.  But ponder this question: If you had a friend with a paid-up house, would you suggest that he now take out a long-term mortgage in order to deposit the proceeds in a money-market fund?  If not, does it make sense for Google to be doing much the same thing?

…and that one got me thinking.  This month, I paid off my house through a series of fortunate circumstances, and now I’m getting the variety of respones on the fact that I’m completely out of debt, including things such as:

  • Gee, I wish I’d been here long enough to make that much. (for the record, I’ve been saving diligently for years to do this, but the job helps)
  • Wow, how does it feel to be out of debt?
  • Dork, you should take advantage of the banks since interest rates are so low.

So, obviously, a debate like this hits close to home (pun intended).  An I’m more on Mr. Mankiw’s line of thinking.  Just because I CAN borrow money, why do I HAVE to borrow money?  It does me no good in emergency times to have a cheap interest rate when I don’t have the cash to pay it, and it does me all the good in the world to be able to save, and give, on my own terms instead of having a bank dictate a significant portion of my monthly spending.

That said, Google is in an interesting position.  They have a pile of cash in the bank, and they want to find flexibiity to spend more.  However, they also have a series of lawyers lining up to go after the cash, and I don’t know that having more is good — especially if it’s leveraged.  Google seems to be making a lot more money than me, so I shouldn’t pick too hard on them.  I’ll just wait to see how this looks in the next few years.  Let’s hope, for Google’s sake, that the market holds strong.

2 Comments leave one →
  1. May 17, 2011 1:28 pm

    hmm. may still be apples and oranges, in this way: when Google sits on material wealth when it could convert it to cash cheaply, it’s a mistake to do so when that cash will earn them even more profit. Pretty much what you already said, I know.

    But how is that true for you or me, unless we have a profit-earning plan with the cash like Google must?

    If we got no plan for it, we don’t need to do it. You’ve done the right thing, just paying off the mortgage.

    The “Gee I wish I were here long enough” sounds like a statement of jealousy from someone who thinks you just Kramer-ed into some luck. Aggravating when you work hard and plan smart to get where you are.

    cheers and welcome back!

    • May 17, 2011 2:04 pm

      I think, though, that Google could use the cash it has to create the wealth. Why would it need to float bonds unless it thinks the cash it has is at risk? Which is my point… there’s risk to the Google budget, but floating bonds probably doesn’t attract the lawyers/sharks to the blood.

      But agree that us mere mortals need to save and spend wisely.

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