As of mid-2012, S&P 500 companies alone held nearly $1 trillion in cash reserves. That figure has almost certainly mushroomed since and there’s been similar stockpiling around the globe, notably by companies hailing from Britain, Canada and Japan.
The flip side of raising so much balance sheet cash has been less corporate investment than there otherwise would be. That in turn has held down companies’ earnings growth and is a major reason why unemployment has remained so high for so long.
Reduced levels of investment have also depressed overall economic growth. That’s raised the frustration level of policy makers like Bank of Canada Governor Mark Carney, who has gone so far as to call record corporate cash levels in his country “dead money.”
Why so much cash on corporate balance sheets now? The obvious explanation is companies are more afraid of losing it by investing in their businesses, than they are troubled by today’s paltry returns on cash in the bank.
To be sure, there are plenty of reasons for managements to be concerned about the future, just as there are for consumers and investors. The talks on the federal budget are far from over. But House Republicans’ tacit vote of no confidence on Speaker John Boehner’s negotiations with President Obama raise the possibility of steep tax increases and government spending cuts kicking in January 1, even if there eventually is a deal.
Such sudden austerity would almost surely have a negative impact on US growth, and by extension the global economy. And that in turn could turn even eventually successful investments into near-term money losers. Executives in many industries also fault zealous Obama administration regulators for fostering uncertainty and diminishing incentive to invest.
The Positive Power of Cash
But amid this gloom, here’s a positive thought: What would happen if a decent percentage of corporate balance sheet cash—say 50 percent—did find its way into the US economy in 2013?
The raw amount of $600 billion or so would approximate the money sucked out in 2013 if there is no deal on the federal budget. The real impact, however, would be through the multiplier effect.
One reason many view a prospective US fiscal cliff as so potentially damaging is the worry that every dollar sucked out of the economy by the government would take at least a few dollars more in reduced private sector activity.
Many economists on the political right fiercely dispute the multiplier effect of government spending. What no one questions, however, is the impact of private sector spending on economic growth. In fact, it’s a sure bet that the positive impact of investing $600 billion in corporate cash would outweigh worst-case austerity in 2013—i.e., no change in the package of tax increases and government spending cuts agreed to in 2011 to prevent a first-ever US government default.
What would it take to unlock all that corporate cash? If 1993 is a relevant example, it could be as easy as just clarifying the long-term rules so companies can do real planning. These rules would spell out specific levels of government spending and tax rates, as well as eliminate the potential for another standoff over raising the federal debt ceiling.
For those whose memories need refreshing, in 1993 President Bill Clinton pushed an extremely controversial budget through Congress without a single Republican vote. Clinton’s package relied heavily on tax increases, never popular with corporate America or Republicans. But more important, it did eliminate uncertainty on future taxes and spending that had kept corporations from investing cash in their businesses.
If nothing else, Clinton’s budget set clear rules management could plan around. The details weren’t what many would have preferred. But investment did rebound and the result was a long period of economic growth and stock market gains.
Can we possibly hope for anything so favorable, with Washington seemingly divided beyond repair? The worst part about going over the so-called fiscal cliff is the unknown—how severely such sudden austerity would affect US economic growth. And if we actually take the plunge, it would likely be several months before we have answers.
Paradoxically, a fall off the cliff could actually unlock long-stalled corporate investment, because we’d finally have some certainty. And of course, any deal between the parties in Washington that really did attack federal fiscal woes and provide visibility on future tax and spending policy could have an even more stimulating impact, even faster.
Admittedly, I’m an optimist—it’s my nature, especially during this time of year, when people around the world are celebrating hope. But here’s a point that even the most pessimistic should consider: There’s no better insulation from a crisis than a big pile of cash.
By choosing to save rather than invest in recent years, American corporations have put themselves in a far superior position to survive a 2013 market and economic crisis (if sudden austerity creates one), than they were in 2008. At a minimum, money in the bank can go to further pay down debt, and/or finance dividend growth and stock buybacks.
Alhough investing in businesses is the most beneficial strategy for long-term wealth building, all such steps would be bullish for investors in 2013. That’s true despite the egg laid by politicians in 2011 by passing the Budget Control Act, the consequences of which lawmarkers are now ruefully facing.
More important, it’s a compelling reason to stick with stocks backed by strong underlying businesses and hefty cash hoards, even when big picture uncertainty is as great as now. If he were around today, even Ebenezer Scrooge would be forced to agree with that sanguine assessment. Happy Holidays!
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