More Evidence of Current Regime Uncertainty?



In a November 3 article, the Wall Street Journal reports that corporate cash holdings have reached extraordinary levels:

Stung by the financial crisis, companies are holding more cash — and a greater percentage of assets in cash — than at any time in the past 40 years.

In the second quarter, the 500 largest nonfinancial U.S. firms, by total assets, held about $994 billion in cash and short-term investments, or 9.8% of their assets, according a Wall Street Journal analysis of corporate filings. That is up from $846 billion, or 7.9% of assets, a year earlier.

The trend appears to have continued in the third quarter, despite an improving economy. Of those 500 companies, 248 have reported third-quarter results. Their cash increased to 11.1% of assets, from 10.1% in the second quarter. Companies as diverse as Alcoa Inc., Google Inc., PepsiCo Inc. and Texas Instruments Inc. all reported big third-quarter increases in cash holdings.

“Everyone is hoarding cash,” says Carsten Stendevad, head of Citigroup Inc.’s financial-strategy group.

The article 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.

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