Corporations Aren’t Hoarding Cash
One often hears of the $2 trillion that American non-financial companies are hoarding, instead of using that cash to hire more workers or make capital expenditures. Alan Reynolds has an excellent piece over at the Wall Street Journal today debunking that claim. An excerpt:
There are two sides to a balance sheet: assets and liabilities…The financial health of corporations is not measured by the form in which assets are held (liquid or not), but by net worth [i.e., assets minus liabilities].
From 2007 to September 2010, the value of nonfinancial corporate real estate fell by more than 30%—a loss of more than $2.8 trillion. The ratio of cash to total assets rose largely because the value of total assets collapsed. Meanwhile, liabilities topped $13.6 trillion last fall, up from $12.9 trillion at the last cyclical peak. With real estate falling and debts rising, the net worth of nonfinancial corporations was only $12.6 trillion at last count—down from $15.9 trillion in 2007.
In other words, the net worth of nonfinancial companies went down by $3 trillion between 2007 and 2010.
Point No. 2, about safety cushions, alerts us to the fact that $1.93 trillion of liquid assets would not begin to cover $3.67 trillion of short-term debts, let alone ongoing expenses such as payroll. To describe the liquid assets as “hoarding” (regardless of debts) is witless. The recession in 2008-09 would have been far less painful if nonfinancial corporations in 2007 had been “hoarding” more liquid assets (they had $1.53 trillion).
Read the rest here.