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Corporations not hoarding cash

Over the past couple of weeks, a lot of people have been talking about how corporations are sitting on $1.8 trillion in cash reserves and that if we could just get them to feel more confident, we could unleash a massive private-sector stimulus. The question, of course, was how to do that.

But Barry Ritholtz presents some compelling evidence that today's reserves aren't anything out of the ordinary. Rather, they're the continuation of a long-term trend toward businesses hoarding money. Check it out:


As you can see, the cash-to-assets ratio more than doubled between 1980 and 2004. The rise between 2004 and 2010 -- which was really a recession-driven drop followed by a rapid recovery -- just puts it back at trend. Which suggests that businesses aren't insecure in a particularly historic way. They're not hiring more and not spending more because they don't see a reason to. But the extraordinary reserves that suggest an extraordinary absence of confidence aren't actually that extraordinary.

By Ezra Klein  |  July 13, 2010; 11:06 AM ET
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These seem like really strange numbers in general, mirroring the rise in income inequality we've had over the last three decades. It seems that amongst a certain rich sector of the US (companies and rich people), their consumption is not keeping up with their wealth, whereas for the masses it's been the opposite. It's just now that because the masses have borrowed the last of their future earnings, the whole system has ground to a halt. So either we're left to live in a tight money world where the standard of living drops considerably for the majority of wage earners, or we somehow figure out how to get this money off the sidelines (taxes and then government spending?).

In general, unless the capital held by the rich and corporations starts getting spent in the US, I'm hard pressed to see where the growth in income for Joe Public will come from (I mean, if the US rich won't even pay for US goods and services that employ Americans, I don't see why foreigners should otherwise do so).

Posted by: scotbrad | July 13, 2010 11:44 AM | Report abuse

Perhaps someone can enlighten me. If corporations have huge hoards of cash in the banks doesn't that mean that, by definition they're not reinvesting this money into the business? (R&D, hiring more employees, expanding the business)

It would be interesting to see how the money spent on reinvestment compares to the amount of cash being hoarded by businesses.

Posted by: world_dictator | July 13, 2010 12:02 PM | Report abuse

I'd be curious what that chart would like if it was inflation adjusted. By the same tact maybe businesses couldn't find inflation hedged places to park their cash - or perhaps they did but the chart doest see those places as liquid assets. Plus perhaps their were taxes influences before the inflationary 70's. In short this could be a return to the a previously distorted reality.

Posted by: conor1971 | July 13, 2010 12:14 PM | Report abuse

This is good color. I was under the impression that businesses were funding a small slice of the deficits of the past few years. While increased safe asset supply might have increased the demand for safe assets by corporations at the margin, this clearly is a long-term secular trend.

This should put paid to the idea that corporate cash 'hoarding' hurts the economy. There was a surge in hoarding during 1990-2005, which can hardly be regarded as a weak period for the U.S. economy.

Ezra's conclusion offers support for what Arnold Kling calls the 'Garret Jones' labor market. Jones believes that in a modern economy, labor is more like overhead that expands a firm's capabilities, but not necessarily its output. Right now, firms don't see the need to invest in extra capability until they are sure the recovery is on solid ground. They can meet incremental demand without additional labor input, or at least without additional bodies.

There is probably another one of Kling's ideas at work here too - recalculation. As I view it, there is a lot of ways to streamline a business that might not be undertaken during an expansion. A severe decline in economic activity forces those changes, and perhaps other changes which weren't anticipated in time of plenty. Those changes were very disruptive for workers (which is why they weren't undertaken in 2007), but they were successful.

I think both the overhead explanation and forced streamlining account for soaring productivity and the reason why we need 8 million fewer people to accomodate pre-recession levels of GDP (which we have roughly returned to at this time).

This also suggests that while the jobs for those unemployed due to their nature as overhead might return, positions streamlined out of existence might not - this is structural unemployment that we'll probably have to deal with for years.

Given all this, this provides a lot of support to Scott Sumner's view that monetary policy should seek to stabilize the growth path of nominal GDP, so that these types of recessions are avoided altogether.

Posted by: justin84 | July 13, 2010 12:15 PM | Report abuse

world.dictator, you ask: "If corporations have huge hoards of cash in the banks doesn't that mean that, by definition they're not reinvesting this money into the business? (R&D, hiring more employees, expanding the business)."

Yep. And if the banks aren't lending it out to other corporations so that THEY can use that same $$ to grow and improve, that means the velocity of money is down. Which is bad for recovery. Adding more money to the economy when the money already OUT there is largely sitting idle is (my opinion) like pushing a wet noodle.

Let's say I have $100,000 in a bank account, saved up for a remodel and expansion of my home that I've been in for 15 years now. I'm going to let it sit there and resist the pressure from my wife to put it into the economy through architects, carpenters, electricians, lumberyards, etc. Why? Because I am worried about tax increases down the road, about whether I will be able to sell it in a few years when my kids are out of the nest, about what health insurance will cost me, and because I see new grads falling back into "dependent" status while they try to find a job.

In my example, I'm like a company saying: "R&D and process improvements and expansion --- all good things and this is probably an opportunity to get good value in these areas -- but I may need that money to weather the NEXT storm of recession, deal with greater regulation, adjust for accounts receivable that turn into bad debts, and so on. In other words, I am being prudent and not entrepreneurial, because I am scared stiff by a whole lot of stuff and lack confidence in government to do the right things.

Posted by: TerryOtt | July 13, 2010 1:23 PM | Report abuse

"I'd be curious what that chart would like if it was inflation adjusted."

The chart is inflation adjusted. That's what "real terms" means at the top left.

Posted by: justin84 | July 13, 2010 1:51 PM | Report abuse

Since Jobs returned to Apple, Apple has "hoarded" cash. This gives it cushion against bad times, flexibility to make purchases or invest in new areas like ... starting an entire top-drawer retail chain from scratch, etc. They can outlast any downturn and invest through it so they come out stronger than their competitors. Not a hostage to debt or leverage.

So there's value to cash.

GM might have done better to hold cash, pay down debt and not pay out bribes (dividends) to shareholders to hold their stock.

Posted by: willNeuhauser | July 13, 2010 4:51 PM | Report abuse

I love this logic, businesses are not hoarding because they have been hoarding all along.
Next, we will find out that the “rich” aren’t really “rich” because they have been “rich” all along. I could live with that .. anyway to end “class warfare” is welcome. But please, don’t extend this logic to “serial killers.”

Posted by: warnerme | July 13, 2010 6:33 PM | Report abuse

Consider for a moment the case of Cisco.

The NYT reported last year that Cisco is sitting on $30 billion. The vast majority of Cisco’s $30 billion in cash — about $26 billion — remains overseas.
Why ? because repatriation will cost them more than they hope they can get down the road. This in turn makes them even more likely to invest "off shore."

Posted by: warnerme | July 13, 2010 6:38 PM | Report abuse

Another perfect example of heteroskadasticity. You guys have to stop charting like this. You forgot to detrend the data. Everybody knows that time series models of this importance clearly have a unit root.

Posted by: bankrchick | July 14, 2010 1:08 AM | Report abuse

"I love this logic, businesses are not hoarding because they have been hoarding all along.
Next, we will find out that the “rich” aren’t really “rich” because they have been “rich” all along."

You missed the point.

The question is whether businesses have *suddenly recently* begun to hoard money, because of some unusual uncertainty about the future in reaction to government policy during the first 18 months of the Obama administration.

The data in the chart appears to show that the "hoarding" is not a reaction to current government policy, but instead is a continuation of a long term trend by businesses to keep higher cash reserves.

Posted by: Patrick_M | July 14, 2010 2:47 PM | Report abuse

I am confused. Ezra refers to this as the "cash to assets ratio," but the chart itself seems to be denominated in billions of dollars. So, which is it? If it's denominated in dollars, then most of the trend over time would probably be caused by real growtth in GDP.

Posted by: tomsawyer2 | July 15, 2010 12:39 PM | Report abuse

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