John Hussman at Hussman Funds has an interesting take on the corporate-cash argument. Many observers, at least of the bullish persuasion, point to bloated corporate cash hoards as a reason to believe that an upcoming wave of corporate spending will provide the next round of stimulus for the U.S. economy.
By their reckoning, cash holdings are at a 30-year high - and the cash will soon be deployed on equipment, expansion and hiring. But Mr. Hussman begs to differ, arguing that those holdings are actually tied up in government debt instruments that cannot easily be liquidated, at least in aggregate.
He explains: "What's fascinating about the 'corporate cash' argument is that few observers recognize that a great deal of this cash is not retained earnings but new debt issuance."
And: "Put simply, there is a lot of apparent 'cash on the sidelines' because the government and many corporations have issued enormous quantities of new debt, often with short maturities, while other corporations have purchased it. It is an equilibrium. The assets that are held in the right hand represent debt that is owed by the left. You cannot call that pile of short-term marketable securities an asset without calling it a liability. The cash on the sidelines is evidence of debt incurred to fund economic activity that is already in the past. It will remain 'on the sidelines' until the debt is retired. The government debt has been issued to finance deficit spending. At the same time, a great deal of corporate debt has been issued over the past year, apparently as a pre-emptive measure against the possibility of the capital markets freezing up again. "