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Liquidity will be key to weathering COVID-19 slowdown
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As businesses around the world grapple with the fallout of the COVID-19 pandemic, the health of the economy could come down to liquidity.
Companies have all kinds of assets, from tangible real estate to intangible patents. Liquidity is how quickly those assets can be turned into something you can spend, said economist Joseph Haslag at the University of Missouri.
Businesses need enough cash on hand to keep the lights on and pay employees, especially when faced with huge disruptions to revenue streams as they are right now.
“It’s really just a giant smoothing process in the face of some bumpy rides,” said Haslag.
On the last bumpy ride for the U.S. auto industry during the financial crisis, Ford was the only “Big 3” automaker that wasn’t pushed to bankruptcy and bailed out by the government — in part because the company had a lot of cash on hand.
Years before the crash, Ford was already facing plummeting sales. “They put everything they owned up as collateral, including the brand, Ford,” said Kristin Dziczek at the Center for Automotive Research.
Leveraging all their assets for cash loans early helped the company weather the downturn. General Motors and Chrysler, on the other hand, had to borrow from the government because by then credit within financial markets had dried up — which in itself made the crisis worse.
“Credit is the mother’s milk of economic activity,” said Mark Zandi, chief economist at Moody’s Analytics. “When there’s not enough credit that’s lethal to the real economy.”
Today, big tech firms like Microsoft and Apple have tens of billions of dollars on hand. But smaller companies in many other sectors could find their cash streams quickly drying up.
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