Hoarding cash

A perplexing problem is the huge hoard of cash that corporations are sitting on and why. The biggest companies are piling up record holdings of cash, in effect taking money out of circulation.

In the United States corporations’ holdings of cash basically doubled over the past decade, as has the ratio of cash to assets since 1990.

The trouble is this mountain of cash curbs the availability of capital in our monetary system. The corporations will be less able to find credit when needed.

Keeping a large amount of cash alleviates the need to secure loans, but also restricts the credit markets and reduces borrowing opportunities for other firms. Hoarding cash is a vicious cycle that tamps down economic activity.

There are many reasons for corporations to hold cash. Some of the super-conservatives say this is proof of the interference of the government with its increasing burden of regulations.

Even in Canada Mark Carney, the Banks of Canada’s former governor, called the approximately $300 billion of cash held by corporations as “dead money.”

Many factors explain companies’ large cash reserves. The low interest rates curbed reliance on banks or the volatile stock market for funds. Despite the recent decline in commodity prices, companies still must recognize the need for adequate reserves to process these commodities.

Also, the fall in the price of investment goods that has taken place hurts profits, so companies responded to compensate for these changes by shifting more from labour towards capital; therefore, cash is needed.

In the past few decades companies have become more indebted, making companies anxious to hold cash.

Then too, in the U.S. taxes based on worldwide income, notably taxes due on corporations operating abroad, make it less likely that those earnings will be repatriated and thus incur U.S. taxes forthwith. Hence, the cash remains as reserves.

Pension funds are underfunded, so corporations are stock piling cash to meet those inevitable requirements.

In this speculative era corporations are on an acquisition binge and this requires cash reserves. J.P. Morgan reported that companies on the acquisition trail have been rewarded with higher share prices.

Finally, given that the economy has been stimulated by cash inflows from governments, a process that cannot continue indefinitely, cash is held against a downturn in the economy.

Given these factors, it is unlikely that corporations will abandon their frugal ways.



Bruce Whitestone