We all know that cash earns next to nothing. It’s a bad investment, and can’t help but lose value once inflation is taken into account. But it’s hard to resist tucking those extra dollars away “just in case” they’re needed.
It seems corporate bigwigs feel the same way we do. “The billions in cash they’ve socked away is a good measure of what global business thinks about our times. It isn’t pretty,” says John Bussey in the Wall Street Journal. According to the Federal Reserve, non-financial companies in the U.S. hold an unprecedented $1.7 trillion in cash.
Consumers are often urged to hold up to six months of living expenses in emergency reserves. But industrial companies in the S&P are now holding, on average, 70 weeks worth of operating cash. That’s 67% more than they held in 2007, before the recession and banking crisis hit.
As Howard Silverblatt, an analyst at Standard & Poor’s, observes, “these companies have extreme excess cash. They’re reflecting the uncertainty of the times. Companies traditionally don’t want to sit on stuff. They want to grow bigger. This is America.” In fact, holding that much cash comes at a price. Companies, like consumers, earn very little on their cash reserves, and lose ground every month to inflation. So if holding cash is unprofitable, why do companies do it? It turns out that they do it for the same reasons consumers do. It makes them feel safer.
Wall Street Journal columnist Bussey interviewed Chief Financial Officers at several large corporations to see how the current climate of fear and uncertainty is shaping their view of the future. Many CFOs have bad memories of how capital markets “froze” in 2008, leaving them with no access to fresh funding. “Having cash reserves now is more important than at any time since 2008,” said one CFO. Another said, “There’s so much volatility, I’d rather be in charge of my own funds than depend on banks that may or may not be here next year.”
That’s not much different from consumers, who learned throughout the Great Recession that it was virtually impossible to borrow money or tap home equity lines in a crisis, when they really needed the liquidity.
What’s the fix? Companies and consumers are waiting for Washington to remove some of the uncertainty that makes it so difficult to plan for the future. If you are convinced you need to hold cash for upcoming expenditures or to cover unforseen expenses, then by all means do so. Just realize that the after-tax, after-inflation return on cash is less than zero, so try to keep cash holdings to a reasonable minimum. Of course, if you have access to other sources of funds in an emergency, then holding large amounts of cash may be unnecessary. Just like in a large corporation, your dollars can be put to better use investing in growth opportunities for the future, but do hold enough funds back to make sure you still sleep well at night.