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.
COVID-19 Economy FAQs
What’s the latest on the extra COVID-19 unemployment benefits?
As of now, those $600-a-week payments will stop at the end of July. For many, unemployment payments have been a lifeline, but one that is about to end, if nothing changes. The debate over whether or not to extend these benefits continues among lawmakers.
With a spike in the number of COVID-19 cases, are restaurants and bars shutting back down?
The latest jobs report shows that 4.8 million Americans went back to work in June. More than 30% of those job gains were from bars and restaurants. But those industries are in trouble again. For example, because of the steep rise in COVID-19 cases in Texas, Gov. Greg Abbott, a Republican, increased restrictions on restaurant capacities and closed bars. It’s created a logistical nightmare.
Which businesses got Paycheck Protection Program loans?
The numbers are in — well, at least in part. The federal government has released the names of companies that received loans of $150,000 or more through the Paycheck Protection Program.
Some of the companies people are surprised got loans include Kanye West’s fashion line, Yeezy, TGI Fridays and P.F. Chang’s. The companies you might not recognize, particularly some smaller businesses, were able to hire back staff or partially reopen thanks to the loans.
You can find answers to more questions on unemployment benefits and COVID-19 here.
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