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Jul 01
2010

Companies sitting on still more cash

Posted by Ron F in TaxTARPrecoveryrecessioneconomydemanddefaultconsumer spendingCongress, cash management, cash concernsCashCarmen ReinhartCareers/Managementcapital expenditurescapexBanks

Ron F

A survey released today by the Association of Financial Professionals will do nothing to dampen the austerity versus stimulus debate.

To wit: Forty-three percent of US corporations had larger US cash and short-term investment holdings this May than they did six months earlier. Only 24 percent of respondents reported that their short-term holdings had shrunk during the past six months.

In a press release accompanying the findings, the AFP described finance executives as "unconvinced of the vibrancy of the economic recovery at hand."

It also quoted Alan Blinder, Vice Chairman, Promontory Interfinancial Network, Princeton economist, and former Vice Chairman of the Federal Reserve Board, making this observation: "Safety and security are foremost on the minds of financial professionals."

I'll say. But that certainly raises doubts about the private sector's ability to lead the way to recovery. Meanwhile, today's Times story by David Leonhardt about the risk that cuts in government spending won't help matters is just the tip of the iceberg of what's raging in raging in the blogosphere.

As a side note, Leonhardt even-handedly reports that there is ample historical evidence justifying the arguments of both sides, but he cites none that backs austerity, and the one heard most often elsewhere has been thoroughly debunked.  

How are the two topics related? Companies sitting on cash constitute "a corporate savings glut" in the words of Rob Parenteau, a money manager and researcher at the Levy Economics Institute.

And he's calling for taxes to force companies to invest the cash.

"What we have here, in other words, is a failure of capitalists to act as capitalists," Parenteau wrote. "Into the breach, fiscal policy must step unless we wish to court the types of debt deflation dynamics we were flirting with between September 2008 and March 2009. So rather than marching to Austeria, we need to kill two birds with one stone, and set fiscal policy more explicitly to the task of incentivizing the reinvestment of profits in tangible capital equipment."

The idea may not go anywhere, of course, and that's particularly true at a time when Congress can't even pass taxes on banks that cost taxpayers billions of dollars in bailouts.

Still, companies sitting on cash because they are doubtful about recovery are undermining prospects for that very recovery, as well as arguments in favor of austerity. And it's hard to see what else besides stimulus will change that. The debt deflation that would result from a reduction in government deficits certainly doesn't seem like much of an answer, since that will only further depress demand and lead companies to sit on even more cash.

The current trend in favor of austerity leads toward a self-reinforcing downward spiral, folks, and I don't see what's going to get us out of it except more government or corporate spending. So what would those worried about the misallocation of capital that comes with government spending suggest be done to get companies to invest?

Sure, they might argue that concern over the federal deficit, and the higher interest rates that might accompany them, is what's keeping companies from investing. But if that's the case, why are they sitting on their cash now, when rates can't be any lower?

As Paul Krugman points out yet again, there's no evidence that bond investors are worried about inflation, not to mention a US default, which, as the debunking alluded to earlier shows, is impossible for a country with a sovereign currency.

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