Thursday, October 13, 2011

Regarding $2Trillion of Cash On Corporate Balance Sheets

Last week's Wednesday edition of the Wall Street Journal carried an article discussing the $2 trillion of cash on US non-financial corporate balance sheets.

It's an eye-popping number, to be sure. According to the article, the level of corporate cash was $1.4 trillion in 2008.

Thus, a nearly 50% increase in cash levels on those balance sheets in 3 years is one of the costs of the continuing turbulence in financial markets and global economies.

After seeing firms go bankrupt as a consequence of relying on short term funding during the financial crisis of 2008, it appears that many US non-financial corporations simply have ceased to trust or depend on their commercial banks and financial markets for operating funds.

Some view this large amount of cash as an impediment to a US expansion, as companies conserve those resources, rather than spend or invest them. And that's true.

But it's a consequence, rather than a first cause. That is, its CFOs' distrust of their prior, typical funding sources that caused them to essentially shift to self-funding. So it really identifies a heretofore hidden, lingering cost of the financial problems of three years ago. And the continuing global economic weakness.

Determined not to be caught out by unreliable funding sources again, US corporations have adapted to current circumstances. And that adaptation does seem to be resulting in a lack of expansive spending and investment.

Yet another source of uncertainty, along with tax and regulatory uncertainties, which drives US business behavior to be more prudent than it otherwise might be. With real consequences for the US economy.

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