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September 11, 2013

Why Are Companies Hoarding Cash?

 

It’s been widely asserted over the past few years that American companies are hoarding cash instead of putting it to work. And it’s true.

The latest data show that S&P 500 companies are holding $1.3 trillion in cash or cash equivalents. Step up to the Russell 3000, a broader group of publicly traded companies, and you get to $3 trillion in cash reserves. These are amounts far in excess of historical trends, even during a recession.

But the size of the cash hoard is bigger than that—much bigger. Because the figures usually cited include only the domestic cash holdings of U.S. companies. They’re also holding an estimated $1.9 trillion overseas.

That’s an enormous supply of cash that could be put to work in the economy. It dwarfs the size of this administration’s failed stimulus bill—for that matter, it dwarfs the size of any stimulus plan fantasized about by the wildest of Keynesian cheerleaders.

It’s even bigger than the Federal Reserve’s quantitative easing program, which essentially has involved printing an estimated $1.3 trillion (so far) in order to buy up mortgage and Treasury bonds. This extreme measure carries enormous future risk of inflation while accomplishing relatively little. Could we have avoided the risks of quantitative easing with policies that encouraged companies to invest their cash?

The class warfare crowd thinks companies are hoarding cash in order to undermine the agenda of President Obama, which is ludicrous. There’s nothing executive-suite types would like better than to be rolling along in a rollicking economy and being feted at the White House, regardless of the occupant.

So what’s wrong? The problem is uncertainty, which is another way of saying that companies are scared. They were no doubt unnerved by the speed and depth of the financial crisis. But they couldn’t help but also notice President Obama’s compulsive demands that higher taxes be extracted from the private sector, which means there is less reward to be had from the risk\reward calculation.

They’ve seen an administration intent on increasing business risks and expenses through an explosion in new regulations and a determination to make energy more expensive. They’ve even wondered about this administration’s commitment to the rule of law in light of its handling of the General Motors bankruptcy.

And of course there is the harmful economic impact of Obamacare, which is becoming more certain with every day that passes.

Here’s the good news: There is a massive amount of capital available, ready and waiting to go to work in the economy, which will create jobs, raise incomes, and help close our budget and entitlement gaps. The private sector is primed to lead a dramatic economic recovery, pending the right policies.

The bad news? This administration just doesn’t get it.


 

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