Why Companies Hoard Cash

A blog about business and economics.
Feb. 13 2013 11:37 AM

Corporations Are Sitting on More Cash Because There's More Cash To Sit On

1360773465475

The long-running dialogue about the trend toward American corporations holding more cash on their balance sheets heated up recently with an exchange between Paul Krugman and Tyler Cowen. Izabella Kaminska sums the whole thing up so far, but I think a good place to start understanding this is with the chart above.

The chart shows the ratio of the monetary base to gross domestic product. We're using nominal GDP here since the quantity of money is necessarily nominal. As you can see, the amount of money in the economy relative to the quantity of transactions has skyrocketed. That money has to be somewhere. In principle, it could all be piling up in my basement. But it's not. It's piling up as excess bank reserves and on corporate balance sheets, while households as a whole are also saving. So where'd the money come from?

It came where all money comes from—the Federal Reserve. Specifically, it came during a relative brief period of financial crisis panic when the Fed injected a lot of money into the system in an effort to stabilize aggregate demand. But it didn't work. Aggregate demand didn't stabilize during this time, but fell sharply. Lots of money printing plus weak demand means a huge increase in the money:transactions ratio. Now, for the past couple of years aggregate demand has been stabilized and is growing, albeit growing somewhat more slowly than it was before the crisis. And the Fed isn't undertaking any wild new increases in base money. So there's no more extra pileup of cash.

Advertisement

Why the Fed failed to stabilize aggregate demand despite having "done so much" to try to do so is a question that remains controversial to this day. But clearly it happened. They did "a lot of stuff" but did not prevent both real output and the price level from simultaneously falling sharply. That left us with an overhang of cash. If we keep plugging along with slow-and-steady growth and no new crises and no new emergency money-printing episodes, we'll get used to this 17 percent ratio just as we used to be accustomed to a roughly 5 percent ratio. Treating the cash stockpiles as the cause of a lack of demand strikes me as misleading—they're a legacy of the extremely weak demand from 2008-2010 and the lack of subsequent catch-up.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Politics

Meet the New Bosses

How the Republicans would run the Senate.

The Government Is Giving Millions of Dollars in Electric-Car Subsidies to the Wrong Drivers

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Cheez-Its. Ritz. Triscuits.

Why all cracker names sound alike.

Friends Was the Last Purely Pleasurable Sitcom

The Eye

This Whimsical Driverless Car Imagines Transportation in 2059

Medical Examiner

Did America Get Fat by Drinking Diet Soda?  

A high-profile study points the finger at artificial sweeteners.

The Afghan Town With a Legitimately Good Tourism Pitch

A Futurama Writer on How the Vietnam War Shaped the Series

  News & Politics
Photography
Sept. 21 2014 11:34 PM People’s Climate March in Photos Hundreds of thousands of marchers took to the streets of NYC in the largest climate rally in history.
  Business
Business Insider
Sept. 20 2014 6:30 AM The Man Making Bill Gates Richer
  Life
Quora
Sept. 22 2014 8:07 AM Why Haven’t the Philadelphia Eagles Ever Won a Super Bowl?
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Science
Sept. 22 2014 8:08 AM Slate Voice: “Why Is So Much Honey Clover Honey?” Mike Vuolo shares the story of your honey.
  Arts
Brow Beat
Sept. 21 2014 2:00 PM Colin Farrell Will Star in True Detective’s Second Season
  Technology
Future Tense
Sept. 22 2014 7:47 AM Predicting the Future for the U.S. Government The strange but satisfying work of creating the National Intelligence Council’s Global Trends report.
  Health & Science
Bad Astronomy
Sept. 22 2014 5:30 AM MAVEN Arrives at Mars
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.