No One Knows
I’ve read that US companies (banks among them) are hoarding cash to the tune of 1.8 to 2.5 trillion dollars. The percentage of cash as it relates to a firm’s total assets is rising and the velocity of money (the number of times, for example, the same dollar changes hands) is also declining. (Note: Much like “sasquatch”, “minion” or “lugubrious”, “velocity of money” is one of my favorite words/phrases).
Why is this bad? Well, say Company X has $100000 in the bank. Company X had been accumulating cash to build an addition onto its factory. It decides, though, to hold onto that cash for reasons we’ll get into in a moment. Instead of forking over that $100000 to an architect, a contractor and a building supply house, that $100000 will sit in the bank, meaning the architect, the contractor and the building supply house will be unable to turn that money around and spend it somewhere else and so on down the line.
Company X’s bank won’t lend it for the same reason Company X won’t spend it: uncertainty.
Businesses, like people, fear the unknown. Chiding businesses for not spending their hoarded trillions is the same as chiding Citizen X for not going shopping with the $20000 nest egg he’s built as a cushion in case he gets laid off.
As someone who leans conservative, I believe that government’s function vis-à-vis business is to create a stable environment which fosters competition and growth. A large part of doing that is limiting the uncertainty companies face when they are doing business. Whether it be Boeing or Fred’s Bowling Alley, there are two questions that must be answered before all others: how much will it cost me to produce my good or service and what can I charge for it.
Business is stuffing cash into mattresses these days (or might as well be…have you checked out your bank’s interest rates?) because they do not know how much it will cost them to do business. We can thank the goings on in Washington today for this uncertainty. Seems to me that our government is doing its very best to ensure that businesses are completely unable to answer the first of their two most important questions.
Exhibit One: Tax policy. Cuts in the death tax rate are set to expire at the end of this year, with rates set to go as high as 55%. I saw a story on the news about a mill owner in Alabama whose business is valued at about fifty million dollars. If these rates do go up that high, his priority suddenly shifts from investing in plant, equipment and people to ensuring there’s enough cash to pay the tax bill so that his sons won’t have to sell this business in order to settle it. Right now Congress is dithering over whether or not to extend the cut. You can bet this business owner his holding onto his cabbage until our gub’mint decides on which side to land.
Exhibit Two: Passing laws without knowing what is in them or how they will work. Back in March, Obamacare was passed and we got this assurance from Nancy Pelosi:
Today, Freddie and Fannie Mac (Christopher Dodd and Barney Frank) gave us financial market reform. Senator Dodd, after explaining how this legislation would touch every facet of our lives, had this to say about the bill:
“No one will know until this is actually in place how it works. But we believe we’ve done something that has been needed for a long time. It took a crisis to bring us to the point where we could actually get this job done.”
Little is known about how these bills will actually work because the numerous bureaucracies both create haven’t written the regulations required by the legislation. Think about it. One bill restructures one sixth of the American economy. Another makes significant changes to how money moves through our financial systems. The folks who wrote and passed the legislation have little idea how it will affect the country and its economy.
This issue came into sharp focus when Representative Henry Waxman called CEOs of several large corporations to come before Congress to explain why they took charges against earnings because of Obamacare. Apparently Waxman saw this as a ploy by the Big Horrible Corporations to give Obamacare a black eye, not knowing that such charges were required by accounting rules. Waxman quietly cancelled the hearings when he was schooled on the law.
Is it any surprise that business owners, large and small, are digging holes in their backyards and burying their cash?
