Corporate Cash

Kevin Drum asks why non-financial firms have been holding a growing amount of cash and muses as to whether this lends credit to the great stagnation thesis. He is referring to a graph published on The Washington Post,

Corporations Holding Cash (Washington Post)

While I can’t discount it for sure, I don’t think this is evidence in favor of the theory that we’re suffering from lessening opportunity for net investment. In fact, rising cash balances amongst firms isn’t necessarily a sign of falling investment. In fact, much of that rise in liquid assets is likely to represent alternative investments.1 Specifically, with the development of new financial instruments — securitization, namely — new opportunities for firms to invest along less traditional lines, if you will, opened up. Wholesale credit markets became popular attractions for banks looking for short-term liquidity to fund long-term lending. So non-financial firms lend large amounts of cash to financial firms. Typically, banks post their assets as collateral. Wholesale credit channels, such as repo and commercial paper markets, became especially vibrant during the past two decades.

Now, I admit I don’t know how much my theory explains, but I’m convinced it has much to do with it. On the other hand, there are other things to consider. Idle capacity has also been growing at a considerable rate, and I don’t know if there’s any relationship between that and this (or between idle capacity and growing opportunities for alternative investments). But, I’m sure there are many forces at play.


1. The sentence originally made more sense: “alternative investments” read “malinvestment.” But, I realized that this may be misleading, since alternative investments aren’t necessarily malinvestment. It’s just that historically that rise in liquid assets reflects a lot of wholesale lending that ultimately saw its way to homeowners. In other words, non-financial firms became increasingly involved, even if indirectly, in fueling the housing bubble.

  • Stadius

    Allow me to posit an explanation: than an increasing degree of industrial concentration and monopoly has led to an increase in mark-ups and thus a redistribution from labour to capital (see the decline of wage-share over the same period); consumption, clearly, faltered. Investment is a little more tricky. You might think that increasing markups should induce investment, but there are two countervailing factors: most obviously, falling consumption, but also the presence of excess capacity arising from the planned cutbacks in production that increasing monopoly implies; why invest when you already have excess capacity? Only a few days ago, I saw survey evidence to suggest that significant excess capacity is a prime reason for not investing (I forget the author, but tomorrow I’ll have it at my desk). Excess capacity is also associated with monopoly in that it may be used to deter entry, as in the Spence (1977).

    There we go; a little out of your comfort zone, perhaps, but this analysis accounts for:

    1. The hoarding of money by business
    2. The growth of excess capacity
    3. Insufficient aggregate demand
    4. The trend toward greater industrial concentration

    I hope that provides food for thought.

    • JCatalan

      That’s a plausible explanation. I don’t know whether, or to what extent, the economy has become less competitive. Let me know the name of that survey you have in mind. By the way, W.H. Hutt advanced the same theory that increased monopolization leads to increased idle capacity, in The Theory of Idle Resources (1939). (Edit: Also, I’d say that this fits my worldview, given corporatism.)

      • Stadius

        Sorry about the delay, I had to ask the library to get the document I had in mind, and they had a little trouble getting hold of it. The survey I was talking about was the CBI Investment Intentions Survey from 1971; there’s a few econometric papers supporting an inverse excess capacity-investment relationship, too, again from the 1970s (I might look for more recent papers when I have time): Burman (1970), Nobay, (1970), Junankar (1970), Smyth and Briscoe (1971), Panić and Vernon (1975).

        Burman, J., (1970), Capacity utilisation and the determinants of fixed investment, in Holton, K. & Heathfield D., The Econometric Study of the UK, First edition (1970), Macmillan

        Junankar, P., (1970), The relationship between investment and spare capacity in the United Kingdom 1957-1966, Economica, Vol. 37, No. 147, pp. 277-292

        Nobay, A., (1970), Forecasting manufacturing investment: some preliminary results, National Institute Economic Review, Vol. 52, No. 1, pp. 58-66

        Panić, M. & Vernon, K., (1975), Major factors behind investment decisions in British manufacturing industry, Oxford Bulletin of Economics and Statistics, Vol. 37, No. 3, pp. 191-209

        Smyth, D. & Briscoe, G., (1971), Investment and capacity utilisation in the United Kingdom 1923-1966, Oxford Economic Papers, Vol. 23, No. 1, pp. 136-143

  • Dan(DD5)

    First, a balance of hoarded cash does not cause stagnation or slump or whatever.. This is just the same old fallacious claim that money needs to “circulate” to be productive, and I would have expected such a fallacious hypothesis to be refuted on the basis of simply exposing it for what it is, yet you go out of your way to offer explanations for why maybe the hoarded cash is not hoarded after all. It probably is the case, in this crazy financial/banking system, that cash balances are not really all cash balances, but this is entirely another story and in no way demonstrates why the core argument is wrong.

    Second, the absolute numbers can mean nothing absent more information on changes in money supply. I see a rise in cash balances, which just by visual inspection, I can guarantee you that it is highly correlated with the increase in the money supply. So given a constant demand for cash by companies, I would expect exactly that – a plot that looks exactly like that and reflects the changes in the money supply. This graph can even indicate a drop in REAL cash hoards for all I know.

    • JCatalan

      I don’t know what you have in mind, but I don’t think anybody was necessarily talking about monetary disequilibrium. Kevin Drum just wonders whether this explains a decrease in investment, and therefore stagnation in the sense of a deceleration in the rate of increase of output. I’m not sure that an increase in liquid assets necessarily reflects an increase in the money supply. An increase in the money supply can also lead non-financial firms to purchase other types of assets. But, I’m sure that an increase in the money supply has something to do with it (for the reasons you give, and also indirectly for the reasons I give [although mine is historically contingent]).

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