ROMEO RANOCO
There has been a lot of discussion about the rising cash levels at major corporations, and exactly why the trend persists. Some observers blame what they see as the anti-corporate agenda of the Obama administration - think financial regulations and health care overhaul - which has apparently made executives afraid to take any chances on expansion. According to one estimate, corporations have stuffed a record-high $1.8-trillion (U.S.) into their coffers, pouting all the time.
However, as we pointed out in this space before, this trend isn't really new. Corporations have actually been building their cash reserves for about 30 years. Now, we've stumbled upon other explanations for the rising cash in a highly entertaining series of blog posts from The Economist and the New Yorker: Don't blame Obama, blame the economy.
According to Andrew Smithers of Smithers & Co., the absolute dollar amounts are less important than the ratio of savings to debt. While cash holdings have been rising, so too have debt levels. He noted that U.S. non-bank companies held liquid assets worth around 23 per cent of debt in the first quarter. That's a little higher than the average over the past 40 years, but it is actually below levels seen in 2006 - before Barack Obama took office. In other words, cash levels are only high because debt levels are also high.
Meanwhile, James Surowiecki pointed out that the economic backdrop isn't exactly encouraging for companies. When the U.S. Federal Reserve chairman says that the economic recovery is "unusually uncertain," can you expect executives to be taking big chances with expansion plans? Remember, these folks were burned during the recent financial crisis, when even companies with strong credit ratings had a tough time raising cash.
"The uncertainty that's keeping businesses from spending or hiring isn't uncertainty about what Barack Obama is doing or saying," Mr. Surowiecki writes. "It's uncertainty about whether the economic recovery is going to stick."