Awash with cash?

In several previous posts
and (,
I have looked at the apparent conundrum of rising/record profits in the US and some other major economies, with corporations apparently ‘awash with cash’, but still not investing enough in the ‘real economy’ to achieve a sustained recovery.

Various reasons for this have been presented.  The two main ones that I have argued for are 1) profits are not the same as profitability and in most major economies profitability (as measured against the stock of capital invested) has not returned to levels seen before Great Recession and 2) such was the leveraging of debt by corporations before the crisis started that this is acting as a disincentive to invest and/or borrow more to invest, even for companies with sizeable amounts of cash.  Corporations have used their cash to pay down debt, buy back their shares and boost share prices, or increase dividends and continue to pay large bonuses (in the financial sector) rather than invest in productive equipment, structures or innovations.

First, let’s be clear on the current situation.  Take the US.  The level of corporate fixed investment as a share of corporate cash flow is at 25-year lows. In previous posts (see above) I have highlighted that this is also a phenomenon to be found in Canada and the UK.

US investment to cash

But an important point is that this apparent ‘hoarding’ began well before the Great Recession, with studies showing that companies see investment as too risky compared to the likely returns, particularly in new techniques (see above post).   And as I have shown in previous posts, profitability is nowhere near levels achieved in the 1990s or in the credit boom period of 2002-6 as this graph on the UK corporate rate of return shows.

UK rate of profit

I have now done a little research on the US corporate sector and discovered that this ‘awash with cash’ argument has a lot more holes in it.

Much has been made in the financial media of the huge cash reserves built up by the likes of Apple or Google, although most of this cash is held overseas in tax-havens like Luxembourg.  But it is true that cash reserves in US companies have reached record levels, at just under $2trn.  (All figures come from the US Federal Reserve’s flow of funds data.)  The rise in cash looks dramatic, especially in the last year.  But also note that this cash story did not really start until the mid-1990s. In the glorious days of the 1950s and 1960s when profitability was much higher, there was no cash build-up

US corp liquid assets

But the graph is misleading.  It is just measuring  liquid assets (cash and those assets that can be quickly converted into cash).  Companies were also expanding all their financial assets (stocks, bonds, insurance etc).  When we compare the ratio of liquid assets to total financial assets, we see a different story.

US corp liquid assets to total assets

US companies reduced their liquidity ratios in the Golden Age of the 1950s and 1960 to invest more or buy stocks.  That stopped in the neoliberal period but there was still no big rise in cash reserves compared to other financial holdings.  And that includes the apparent burst in cash in the last year.  The ratio of liquid assets to total financial assets is about the same as it was in the early 1980s.  That tells us that corporate profits may have been diverted from real investment into financial assets, but not particularly into cash.

I also compared corporate cash holdings to investment in the real economy and I found that there has been a rise in the ratio of cash to investment.  But that ratio is still below where it was at the beginning of the 1950s.

US corp cash to investment

Why does that cash to investment ratio rise after the 1980s?  Well, it is not because of a fast rise in cash holdings but because the growth of investment in the real economy slowed in the neoliberal period.  The average growth in cash reserves from the 1980s to now has been 7.8% a year, which is actually slower than the growth rate of all financial assets at 8.6% a year.  But business investment has increased at only 5.3% a year, so the ratio of cash to investment has risen.

Interestingly, if we compare the growth rates since the start of the Great Recession in 2008, we find that corporate cash has risen at a much slower pace (because there ain’t so much cash around!) at 3.9% yoy.  That’s slightly faster than the rise in total financial assets at 3.3% yoy.  But investment has risen at just 1.5% a year.  So consequently, the ratio of investment to cash has slumped from an average of two-thirds since the 1980s to just 40% now.

US corp cash and inv growth

It does seem that there has been build-up of cash relative to short-term debt, particularly in the credit boom of 2000s.  This suggests that corporations were borrowing more then and needed to increase their cash buffers as a safety measure.

US corp cash to ST debt

So companies are not really ‘awash with cash’ any more than they were 30 years ago.  What has happened is that US corporations have used more and more of their profits to invest in financial assets rather than in productive investment.  Their cash ratios are pretty much unchanged, suggesting that there is not a ‘wall of money’ out there waiting to be invested in the real economy.

9 thoughts on “Awash with cash?

  1. Whether companies are “really more awash” in cash than they were 30 or 50 years ago, when comparing cash ratios to total financial assets misses the point.

    Values for amounts of cash and cash type assets held outside the US are unknown as they are not reported to nor investigated by the Fed, the US Dept. of Commerce, etc.

    In the US however, it you access the Dept. of Commerce’s Bureau of Census, and did into the QFR’s you can build your own table of selected data for the years 2000-2013. 4Q cash, time deposits, short term govt. and financial holdings, like commercial paper have increased from 2000’s $286 billion to 2013’s $576 billion– sure that’s about 6% per annum, but $300 billion here, and who knows how much over there (money which in many cases is “leant” to the parent company, or used to finance purchases on behalf of the parent) and it adds up, you know, to where one might say– “Hey, they really are awash in cash.”

  2. Michael,

    Maybe calculated on the same basis that Marx calculates the rate of profit that is against the total productive capital advanced for a single turnover period the rate of profit for the 1950’s/60, is actually much lower than it is today. In fact, it is, even for the US, because rises in productivity have significantly increased the rate of turnover of capital.

    Moreover, part of the reason for this is that the proportion of fixed capital within the laid out productive-capital falls, but rises within the proportion of advanced capital, precisely because this increase in the quantity of fixed capital brings about the increase in the rate of turnover. Taking this into consideration, the tendency for the rate of profit to fall as a result of the rise in the organic composition resulting from this technological change, is more than offset by its corollary the rise in the rate of turnover, so that in fact the annual rate of profit rises rather than falls as a result of this rise in the organic composition.

    Moreover, as Marx sets out in Capital II, the other consequence of this is that advanced capital is released. As Marx points out, its frequently employed then in new lines of business where the organic composition is low and rate of profit is high. This is particularly the case in periods of rapid technological change such as the one we are going through.

    Moreover, could it not also be the case that the explanation for apparent low levels of investment, is precisely this. Around 80% of the economy today is in services, which generally you would expect in whatever sphere would be labour rather than capital intensive. Add in the fall in the value of capital, it would not be at all surprising if the value of investment appears to be low.

    But, it seems to me that the point made by Andrew Kliman is valid.

    “Companies’ decisions about how much output to produce are based on projections of demand for the output. Since technical progress does not affect demand – buyers care about the characteristics of products, not the processes used to produce them – it will not cause companies to increase their levels of output, all else being equal.” (Note 4, Page 16, The Failure Of Capitalist Production)

    Modern capitalism is characterised by very large companies that plan their investment for years ahead in very large chunks. This is not 19th century capitalism, where individual capitalists decide to invest their profits on the basis of day to day changes in market prices and profits. In fact, as Marx points out quoting Richard Jones, even in his day firms would tend to invest more when their profits were falling in order to reduce their costs and increase market share rather than vice versa.

    Taking on board Kliman’s comment above, we have a period after 2008 characterised by considerable uncertainty. In the US, there have been repeated political crises over the debt Ceiling, Sequester etc. that have made it uncertain whether the fiscal stimulus would continue in place to stimulate demand, at a state and local level the Tea Party has even been able to pursue austerity policies similar to those pursued in the UK, and imposed on parts of Europe, that have depressed aggregate demand. Its not surprising then that consumers have held back spending, and capital has held back from investment decisions.

    As Marx put it under such conditions,

    “Not every augmentation of loanable money-capital indicates a real accumulation of capital or expansion of the reproduction process. This becomes most evident in the phase of the industrial cycle immediately following a crisis, when loan capital lies around idle in great quantities. At such times, when the production process is curtailed (production in the English industrial districts was reduced by one-third after the crisis of 1847), when the prices of commodities are at their lowest level, when the spirit of enterprise is paralysed, the rate of interest is low, which in this case indicates nothing more than an increase in loanable capital precisely as a result of contraction and paralysation of industrial capital… Hence the demand for loanable money-capital, either to act as a medium of circulation or as a means of payment (the investment of new capital is still out of the question), decreases and this capital, therefore, becomes relatively abundant. Under such circumstances, however, the supply of loanable money-capital also increases, as we shall later see.”

    (Cap. III, Ch. 30)

  3. There is also, of course another point that explains this behaviour, which was also foretold by Marx. In Capital III, Chapter 14, Marx talk briefly about the extension of stock capital. Marx points out there, and later in his analysis of the Trinity Formula, that the advent of stock capital means that the category “profit” essentially ceases to exist.

    The capitalists become coupon clipping share and bond holders who receive not profits but interest in the form of dividends, whereas their social function is taken over by professional managers, who again are paid not profits but wages – and today we would add also dividends via their stock options. Marx makes clear that this change has significant implications for investment, because you act differently when you are a manager using someone else’s money than if you were using your own.

    In fact, a look at the limited number of IPO’s over the preceding period, compared to the amount of money from balance sheets that has been used for share buybacks, strongly suggests that CEO’s have been using large amounts of cash to boost share prices, and thereby boost the value of their own stock options, rather than use the money for productive investment.

    But, even within the context of what might seem beneficial to the company itself, you can see why this might be justified. Over the last 30 years, the rise in the Dow 30 from 1,000 to 16,000 way exceeds any return from productive investment any capital would be likely to have made during that period. In the last 5 years alone the Dow has more or less doubled. Is it any wonder then that coupon clipping capitalists are more interested in obtaining a quick capital gain of 20-30% on their money, than investing it in productive activity for some prolonged period with uncertain results? Is it any wonder even that they see this as the prime factor in decisions about which shares to buy rather than the potential for high levels of dividend?

    But, that logic applies also to the CEO and CIO deciding how best to utilise a cash hoard. Of course, the build up of fictitious capital cannot last, it will all come crashing down, but for the reasons Minsky set out, and Marx before him, until such time as it does, no one believes it will.

  4. I think the examination of aggregate corporate financials misses important parts of the bigger picture in the same way that examinations of aggregate personal income and/or wealth does.

    This blog post…..

    …..has a figure for corporate balance sheet cash which I assume corresponds to your “liquid assets to total financial assets” figure , above. It shows the top 50 S&P firms at over 60% , and the rest of the S&P at ~35% , compared to your graph above for all corps at ~12%.

    The main point being that the relative liquidity of a corporation – or an individual – is increasingly a function of “class”. If you’re one of the lucky few , you can easily explore any and all of your investment ideas. What you may lack is good ideas. If you’re one of the vastly more numerous unluckies , you can have good ideas up the wazoo and no way to pursue them without signing them away to others in ways that destroys the incentive to pursue them in the first place. This seems like a bad way to run an economy to me.

    1. Your reference blog post shows that most of the cash reserves are held by the top big companies (60%). This is not the same as the ratio of cash to total financial assets that I estimated. But your post also shows that the smaller companies have more debt and so the whole cash/debt nexus is skewed against small businesses. Yes, indeed.

  5. “What has happened is that US corporations have used more and more of their profits to invest in financial assets rather than in productive investment.”

    I think these are interesting figures. Presumably, the rise of international Finance coupled with declining profit rates in the Productive sector has led more companies to divert their profits into Financial assets? This in turn has fed the expansion of Finance in recent decades.

    But what is the impact of this diversion on the rate of profit itself? Profits diverted away from productive expenditure into unproductive would counteract the downward pressure on the rate of profit.

    1. Maybe… and maybe the growth in financial investments has to do with the ability to fund pension liabilities and health care benefits. It needs a bit of investigating

  6. Falling rate of profit is precisely why there are so many financial shenanigans. Rich people don’t see productive places to invest their money that have reasonable chances of paying off so they are playing all kinds of games with it, or investing in empty luxury high rises or private space travel or bidding on art, or just leaving it in the bank. With inflation as well as frightening whispers of geopolitical threats to the primacy of the US dollar they must feel a desperate urgency to keep turning their money into more money. I like Richard Wolff, I am a little surprised he doesn’t see that. It’s my understanding there was a significant dropoff in consumer demand AFTER the crash of 2007 and while this a factor in the weak and largely jobless recovery it logically cannot be the cause. I confess I still have a hard time grasping how falling rate of profit works,still like the rising rate of global temperatures it’s an undeniable reality.

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