The article [WSJ, Nov 3. -ed] attributes the extraordinary cash holdings to long-term trends and to apprehension left over from last year’s so-called credit crunch.
The large cash holdings may also reflect presently prevailing regime uncertainty — the inability to confidently forecast how the government will treat private property rights in the future. When such uncertainty attained great heights during the years from 1935 to 1940, entrepreneurs reacted by declining to make many long-term investments, putting what investments funds they did commit overwhelmingly into short-term and intermediate-term projects, such as purchases of tools and equipment and additions to inventory. The shortest-term investment of all, of course, is to hold cash.
At present, interest rates are so low that a firm sacrifices little by holding cash, rather than, say, securities or other assets promising payoffs within the next few years. The longer term remains clouded by uncertainties associated with the government’s pending initiatives in energy, environmental policy, health care, financial regulation, taxation, warfare, monetary policy, and other key areas. The possibility exists that policies will be adopted that spell ruin for thousands of firms, especially those that hold illiquid, long-term assets whose values will be adversely affected by the new policies.
It comes as no surprise, then, that firms are clinging to huge hoards of cash. True, it’s only fiat money, and the Fed may destroy a great chunk of its value before long, but with cash one has the ability to move quickly to shift investments and cut the losses, whereas longer-term assets may lock firms into positions from which they will find it difficult to bail out without great losses when the next government-spawned crisis hits.
No doubt there is some truth to this. To what degree is the more interesting question.
Higgs is missing some basic observations here. I didn't think there was any question about why the Velocity slowed when the Fed is up against the zero bound. NY Fed's explanation of liquidity traps: http://www.newyorkfed.org/research/economists/eggertsson/palgrave.pdf
ReplyDeleteIf demand for money is perfectly inelastic (pretty much tilts in that direction during any downturn and this one's been a biggie) than it's no secret why firms are hoarding cash. The elephant in Higgs' room aren't "regime uncertainty" or the low FFR. We don't have to finesse the facts unless you have a particular axe to grind (cough, cough).
One final nail in the coffin. The "securities or other assets" that Higgs adores aren't producing real value. For somebody taking swipes at fiat money he should know better than to worry about lack of, so called, investment. What we need now aren't securities bets or leverage, but capital "I" Investment.
Does investment not spur Investment?
ReplyDeleteThat's a great question, and I think the answer is the jury is still out. Small "i" investment can be spent on any number of things (for example the recapitalization of banks by the Gov. has funded a lot of bonuses this year), but in an ideal world capital is raised almost exclusively for Investment. This would make a great thesis for a finance PHD, the investment Investment multiplier.
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