Trillions in Corporate Cash... Real or Chimerical?

Recent press reports of a record cash hoard on US corporate balance sheets have led to complaints that companies are not investing aggressively enough to pull the economy out of recession. Copious cash appears to be available. Prior to the start of the “Great Recession” (i.e. the third quarter of 2007), total liquid assets on the balance sheets of non-financial corporations totaled $1.5 trillion, and represented 5.3% of corporate assets. Today the cash hoard totals $1.8 trillion, or 7% of total assets on a market value basis. In other words, seven cents of every dollar is held in the corporate “piggy bank” as opposed to being invested in longer-term, (presumably) more productive assets. The longer-term numbers also favor cash. Over the 144 quarters between January 1973 and the fourth quarter of 2008, cash steadily increased as a percentage of corporate capital. Given these trends, critics say capitalists are failing to take risk and act like capitalists.

Companies respond that the frenzy of lawmaking in Washington over the last several months (see the 2400-page healthcare and 2300-page financial regulation reform bills) has them scared stiff. They're paralyzed by regulatory uncertainty. They’re quick to add that the Federal Reserve's bloated balance sheet, the soaring fiscal deficit and moribund bank lending all indicate that the government has done nothing but shuffle the nation's deck chairs. Instead of working to help the economy comprehend the very real losses which precipitated the financial crisis, corporate leaders say policymakers have orchestrated a great game of extend and pretend. Whatever you want to call it, corporations are hunkered down with their cash, even though it earns nothing. It's a perfectly reasonable strategy in an economy suffering from ongoing, grinding deflation.