Corporations and Cash Hoarding

A Cash Buildup and Business Investment

by Robert Sadowski

"As the economic recovery continues at a slow pace, some observers point to the vast cash reserves sitting on corporate balance sheets as one reason for a lack of more robust job creation. The thinking is that if firms would simply begin investing this cash in new plants, equipment, and employees, the pace of the recovery would pick up and bring unemployment down. However, many company executives are waiting until the slow pace of the recovery quickens before putting additional cash at risk.

Nonfarm, nonfinancial corporations continue to build their holdings of cash and other liquid assets. By the end of the third quarter 2010, these assets totaled more than $1.93 trillion, an increase of 14.4 percent over the prior year’s level and a rise of 4.7 percent since the end of June 2010. Nationally, cash and checking deposits held by corporate businesses rose by just over 200 percent, or almost $300 billion, from the beginning of the recession in December 2007 to September 2010. Some of this increase may reflect a reduction in dividend payments (at least through 2009) and the increased proceeds from bond issuance in a low-interest-rate environment. Cash holdings and other liquid assets as a share of total corporate assets also saw a sharp increase, rising around 2 percentage points since the start of the recession. That share is the highest it’s been since the mid-1950s (7.4 percent as of September 2010)."

Source: Federal Reserve Bank of Cleveland, Economic Trends, 01.10.2011

Nonfinancial Corporations: Cash Holdings and Other Liquid Assets (for the US)

....and this very interesting chart from the WSJ:

Nonfinancial corporations' holdings of cash as a percentage of each country's GDP