Google plays the yield curve | Hacker News Reader

Google plays the yield curve

marginalrevolution.com

A commenter on this blog, L. Zhang, made an excellent point that most of Google's cash is trapped overseas. Repatriating it to the US to buy US companies would cost them 35% in tax.

Borrowing US money at 3.75% to buy US companies is far cheaper than using their own cash reserves.

Borrowing at 3.75% is like getting free money. Real inflation rate is higher anyway.

http://www.shadowstats.com/alternate_data/inflation-charts

Accoring to http://torontostar.morningstar.ca/globalhome/industry/news.a... Google has 17 Billion offshore and 20 Billion in US they are not as cash strapped as Microsoft which has almost all its cash outside of US.

I think what they are doing is getting some practice issuing bonds. Since they are Google, they can't just dip a toe in the water.

They have a great name and their ad business is looking more like reliable cash cow. Over time it makes sense to leverage stable cash flow. My guess is they will continues to issue bonds over time.

No. What they are doing is heavily betting that inflation will go up, or that the US currency will fall relative to other currencies. They don't need an extra $3B to buy anything. That would be like me borrowing $3k when I already have $37k to buy furniture and nick nacks. Sure a good sofa might cost $2k or so, but most of the stuff I'll be buying are way less than that and I certainly don't need the extra $3k.

WIth $37 billion in cash currently they are bleeding money with negative real interest rates. It doesn't make much sense that Google is worried about inflation here. Also, consider that Google has about $17 billion in cash overseas to avoid US taxes and may not be able to deploy the full amount of funds at home.

Google may be altering their capital structure to include more debt which will do a few things, 1) lower to firms cost of funds and allow it to better operate in a lower interest rate environment. 2) Debt offers firms a tax shield, by putting out some debt,Google can lower its effective tax rate.

With interest rates at historic lows it makes sense to borrow as much as you can. We have negative real interest rates currently. If you borrow at a big economy like Google, paying back the debt will be much easier in this environment and the lenders stand to loose on a purchasing power basis.

"the lenders stand to lose on a purchasing power basis."

Because the the long term debt's interest rate will be lower than the inflation rate, correct?

Your response is just absurd, and completely misguided. The Fed is already targeting a 2% inflation. Virtually every competent finance manager knows inflation will be around those percentage points. Inflation is not the issue. Interest rates are at historic lows, and Google is simply using arbitrage by offering investors higher interest bonds while competing against essentially free no-interest Treasuries from the Fed.

His argument might be wrong, but is not absurd. The Fed can't guarantee inflation, and some very well known managers have lightened up on Treasuries. Also I'm not sure what "arb" Google is getting here, beyond an attractive spread to Treasuries for their debt offering.

Not exactly true on inflation. If inflation gets above 2.5% for example, they'll raise interest rates. They're explicitly targeting 2%. Bernanke has stated this repeatedly. You're underestimating the power of the Fed and its control of the money supply to curb inflation.

The fact is that control systems break down sometimes. The Fed doesn't even use very good inflation indicators. (E.g. housing component of CPI). It seems pointless to limit the support of the distribution the way you suggest in order to make argue the absurdity of the parent post.

You use any index to measure inflation. What index do you prefer, and how would you measure inflation?

The fact is inflation will not go into hypergrowth mode (or even above a few percentage points of what the index gives you), which I assume the poster above is assuming. The hysteria over massive inflation is extremely overblown, and profiting on high inflation is not the best strategy when you're investing billions.

If Google thinks inflation is going up, why are they acquiring more cash?

If there is high inflation, then the lump sum of principal borrowed will be easy to pay back in 10 years. Of course they must invest the funds in some kind of real asset to realize this benefit.

> An alternative explanation is that Google has a very high option value for the cash, which more or less implies they see a lot of acquisition and investment opportunities in their not so distant future. A lot.

But don't they have $37 billion in cash already?

I think the critical point is that a lot of that cash is overseas, subject to taxes when brought back home.

They're getting cash to buy Twitter?

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