Category: Economics

Kathleen Kahle, a professor at the University of Georgia's business school, offers another reason: the growth of high-tech companies, which tend to hold lots of cash. Younger, riskier firms have more difficulty raising money when credit is tight, so they keep more cash on hand, she says. "At the same time, they have a lot of growth opportunities and want to make sure that they have the funds necessary to invest in good projects," she adds.

At the end of the second quarter, the 54 biggest information-technology firms held $280 billion — or 27% of their assets — in cash, according to the Journal's analysis, a higher percentage than any other industry group. Cash balances grew further in the third quarter for the 34 companies in that group that have reported results.

Consider Google. The search giant's cash and short-term investments rose 53% to $22 billion in the third quarter from a year earlier, accounting for 58% of its total assets.

The cash provides "operating and strategic flexibility," Google Chief Executive Eric Schmidt told analysts last month. "We're very happy to have it sit in our bank account and earn a modest interest rate."

Here is more.  Apple is also hoarding cash.  This report suggests that hospitals are hoarding cash, as does this report.  Are these sectors weak in aggregate demand and expected aggregate demand?  No, quite the contrary.

We are told that this cash hoarding is a sign of weak AD, yet firms which face high demand for their products hold especially high levels of cash.  So is it a sign of both weak demand and strong demand?  Maybe so, but then we need to be very careful with inference and we must consider whether extant hypotheses explain the cross-sectional variation in cash holdings and not just the aggregate.  There are many puzzles in corporate finance, especially when it comes to explaining changes in the aggregates, and this is likely one of them.

These are only polls, but:

In a recent survey of company chief financial officers that Duke's Mr. Graham conducted with CFO Magazine, he found that companies expect capital spending to increase by 9% over the next year, compared with 1.5% when he asked the question in December. They expect employment to grow by 0.7%, compared with the 1.4% drop they expected six months ago.

When it comes to firms holding more cash, we still do not understand what is going on.  Here is my previous post on the topic.

Luckily, a new shop in China will let you vent your frustrations on other people's equipment without dealing so much as a scratch to your own. After paying for the right to abuse an old TV, mobile phone, plate, chair or other item — yes, the Pottery Barn rule still applies — you have up to one minute to unleash your wrath upon your target. As an additional bonus, the store makes motorcycle helmets and gloves available to prevent injuries. But there's a catch: if you're not a woman, you can't play. Looks like frustrated men will have to stick with the ol' pillow standby for now.

The link is here and I thank Vinnie and Trevor Wagener and also John Thorne for the pointer.  Here is further information.

I don't know and neither does anybody else.  Here is one set of recent estimates, as reported in The Guardian:

…economists at Dutch bank ING…have produced one of the first financial models of what might happen if the single currency falls apart during 2010. In a bleak assessment, entitled "quantifying the unthinkable", they warn that in the first year alone, so by the start of 2012, output would fall between 5% and 9% across various member states, while their new national currencies would fall by 50%.

Please don't fix those numbers in your mind, so here's the real point.  The new national currencies, of the poorer countries, would fall by some amount.  If that amount is small, that also provides reason to believe the current Eurozone can survive.  If that amount is large, it provides reason to believe the current Eurozone cannot survive.  (The poorer countries would now have to deflate a lot, and there would be a greater risk of a speculative attack on their banking systems.)

You might think that the collapse of the current Eurozone, and the devaluations, are good in the longer run (I do), but in the short run the entire process would be a nasty, volatility-laden, solvency-revaluing shock to the entire global economy.

You therefore should expect "either an OK outcome, or a very nasty shock," in exactly that conjunctive form.  You shouldn't expect something in between.  The conditions where the current Eurozone collapses are precisely the same conditions where the shock of transition is a big one.

And that includes a deflationary exchange rate shock to Germany as well.

There has been much recent discussion of the topic and I apologize (to RA, among others) for being late to the party.  Here is one piece by Yves Smith in the NYT and here is an Economist symposium on the topic, with many first-rate contributors.  Overall I am puzzled at the nature of the worry here.  Corporations with cash surpluses are not destroying real resources, nor are they stuffing cash in their mattresses.  They are investing in financial assets.

Take a financially conservative corporation, which holds its surplus in the form of T-Bills.  If it bought the T-Bills fresh at auction, that's lending money out to the government and the capital is still deployed.  Isn't that called…in some circles…stimulus?  (I've even heard the multiplier might be 1.4!  Or does only the borrower get credit and not the lender?)  It's trickier if the corporation buys the T-Bill on the secondary market, but still a) someone else has the money now, and b) this resale opportunity encourages other investors to buy freshly created T-Bills, thus putting capital in the hands of the government.  In terms of final effect, there should be a near-equivalence between buying old and new T-Bills.

Of course you might think the government is not spending this money well, but that's the problem of the government, not the corporate surpluses, which indeed are being invested.  I ran a surplus this last year and paid off some of my mortgage; does anyone think I destroyed net real resource investment?  (In fact I redistributed profits away from the financial sector, I suspect, which is good for the real economy at this point.)

If velocity is too slow for a social optimum, is it the corporations — who strive to rapidly invest excess cash in the till — who are at fault?  Even if corporations are not helping matters, are they doing anything worse than passing off a hot potato?

You might make an external cost argument.  Perhaps each corporation does well by holding T-Bills, but the system as a whole suffers under the encroachment of state power and public sector expansion.  That's not an argument which many proponents….do I even need to finish this sentence?  

It is perfectly fine to claim that we have a sectoral misallocation and that high corporate cash reserves are a symptom of this problem, for instance maybe there is too much lending to the safer, commercial paper-issuing big corporations and not enough lending for higher-yielding, riskier start-ups (no one knows which risks to take), or whichever story you wish to tell.  I hold a version of that view myself, but it's very different from believing that high cash reserves are stifling investment per se.

By the way, these high cash reserves are one reason why I don't think Alex's nominal wage stickiness story explains current unemployment.

Why is it so frequent that economists take Keynes's analysis of sitting on currency and apply it to savings and investment?

File under "Yet another discussion of the Junker problem."

As I’ve said before, if we’re going to cut spending on retirement programs then it makes much more sense to reduce Medicare outlays by $1 than to reduce Social Security benefits by $1. Social Security benefits can be used to buy health care, and reducing Medicare spending could reduce system-wide health care costs. What’s more, if we’re going to cut spending on retirement programs then such cuts should be broadly shared and not exclusively inflicted on younger people. Such moves are both fairer and more credible. Last, if you want to cut Social Security benefits you should just cut Social Security benefits. Reducing outlays via the mechanism of a higher retirement age is going to mean that the incidence of the cuts falls most heavily on people with physically taxing–or simply boring and annoying–jobs. It’s one of the most regressive possible ways of trimming spending.

That's from Matt Yglesias.

Low-denomination U.S bank notes change hands until they fall apart here in Africa, and the bills are routinely carried in underwear and shoes through crime-ridden slums.

Some have become almost too smelly to handle, so Zimbabweans have taken to putting their $1 bills through the spin cycle and hanging them up to dry with clothes pins alongside sheets and items of clothing.

It's the best solution – apart from rubber gloves or disinfectant wipes – in a continent where the U.S. dollar has long been the currency of choice and where the lifespan of a dollar far exceeds what the U.S. Federal Reserve intends.

Zimbabwe's coalition government officially declared the U.S. dollar legal tender last year to eradicate world record inflation of billions of percent in the local Zimbabwe dollar as the economy collapsed.

The U.S. Federal Reserve destroys about 7,000 tons of worn-out money every year. It says the average $1 bill circulates in the United States for about 20 months – nowhere near its African life span of many years.

That's one way to conduct a countercyclical monetary policy, namely put old bills in the wash.  Yet it is tricky because velocity should decline as well.  (Do they get the proper degree of monetary endogeneity?  Is this actually a free banking model?)  Rather than unloading your money quickly, you have other options:

Zimbabweans say the U.S. notes do best with gentle hand-washing in warm water. But at a laundry and dry cleaner in eastern Harare, a machine cycle does little harm either to the cotton-weave type of paper. Locals say chemical "dry cleaning" is not recommended – it fades the color of the famed greenback.

The full article is here.  For the pointer I thank Jeremy Davis.

The NHTSA had volunteers drive a test track in cars with automatic lane departure correction, and then interviewed the drivers for their impressions. Although the report does not describe the undoubted look of horror on the examiner’s face while interviewing one female, 20-something subject, it does relay the gist of her comments.

After she praised the ability of the car to self-correct when she drifted from her lane, she noted that she would love to have this feature in her own car. Then, after a night of drinking in the city, she would not have to sleep at a friend’s house before returning to her rural home.

From CSV.  The Peltzman effect doesn’t mean that improvements in safety are always negated but it does remind us that we can never ignore the human response.