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Companies sit on huge reserves of cash

A photo illustration with buildings and businesses made out of money and cash.

KAI RYSSDAL: There is an unbelievable amount of cash floating around out there. Unbelievable as in, well, into the 13-digit range.

Standard and Poor's says just the non-financial companies in the S&P 500 -- that is to say, not including banks and insurance companies -- have socked away more than $1 trillion. A record, should you be curious. And up 12 percent since last year.

Marketplace's Adriene Hill explains companies have good reasons to stuff their piggy banks whether the economy's up or down.


ADRIENE HILL: What do companies do with all that cash?

It's easy to imagine it like some sort of a New Yorker cartoon, where a CEO luxuriates in a room stacked high with thousand dollar bills, just smelling the money. But, corporate cash has good use beyond the sheer pleasure of it.

ROBERT DUVIC: Companies, I think, are fearing the future. If you have cash you can ride through bad times.

Robert Duvic is a professor at the University of Texas at Austin.

DUVIC: In a way companies use cash the way we use cash, to store purchasing power until we need it.

So sort of an emergency fund I have in case my car breaks down?

DUVIC: A big one, yes. But a lot more than a car breaking down.

The last recession was more like the whole road crumbling. Credit markets froze up, and companies didn't have access to the cash they depended on to make purchases and investments. So they're holding onto more money now.

There are other reasons for the tight-fistedness. For one, companies might not see any good places to put their cash -- no clear investments to make. Also...

ROBERT MITTELSTAEDT: The company that operates conservatively is doing so in the interest of it's shareholders, certainly, but also in the interest of its employees.

Robert Mittelstaedt is dean of the W. P. Carey School of Business at Arizona State University. Sure, he says, the company might not be hiring right now. But it's using its money to insure it'll be able to keep the employees it has if things go bad. Some jobs are better than no jobs. And, Mittelstaedt says, there's another reason big stacks of cash are good in uncertain markets.

MITTELSTAEDT: Opportunities come up that you didn't know about.

Maybe it's a good time to attack your business rival; maybe it's a good time to swallow them up.

MITTELSTAEDT: So competitors may be going out of business, or competitors may have difficulty. And then the question is do you want to buy that competitor, outright, for a cheap price, at a bargain.

Mittelstaedt says cash-rich companies can take advantage of uncertainty, capitalize on it -- for the day, whenever it is, when things are clearly heading up.

I'm Adriene Hill for Marketplace.

About the author

Adriene Hill is a senior multimedia reporter for the Marketplace sustainability desk, with a focus on consumer issues and the individual relationship to sustainability and the environment.
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First I am a great fan of your show .It does not appear that the capitalists are very confident in the system that they attempt to promote and export to burgeoning new markets .How can the economy expand or grow if businesses do not invest back into the system ? It seems that the CEOS,CFOS , and other on top pay themselves first before investing or expanding it's workforce .By the way we live in a consumer economy were 70% of all the manufacturing , selling , and buying is dependent on the American consumer .Without jobs or the prospect of one , who can afford to buy anything at all ?

Hmm...so when Republicans talk about "job creators" they're really referring to "cash hoarders"; I guess "cash hoarder" just doesn't have the same ring to it...

I can think of three reasons for corporate cash hoarding. First, the repo (repurchase agreement market) used to fund quotidian corporate expenditures collapsed in 2008 and has not recovered to pre-collapse levels. Second, about half the cash is from foreign operations and management does not want to repatriate it unless they get a huge tax break when they do. Third, why invest and hire when demand has dropped in a debt deflationary economy, when the business has more than enough capacity to meet existing demand? This has nothing to do with a “second recession” since the Great Recession never ended except in the minds of the supercilious economists at the NBER.

The solution is government investment, called fiscal stimulus. This creates the private demand that is necessary to lift the economy out of recession. Unfortunately, Republicans are tenaciously fighting for the opposite: austerity. They do not waste this opportunity to use the crisis to shrink government social welfare programs that benefit most Americans but not the political donor class who finance their campaigns. They have blinded themselves with their own twaddle for 30 years that they cannot see that this will eventually harm everyone. The damage caused byOsama bin Laden and the Islamic terrorists pales with today’s Republican Party, financial oligarchs and mega banks

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$1 trillion. A record, should you be curious. And up 12 percent since last year.

Marketplace's Adriene Hill explains companies have good reasons to stuff their piggy banks whether the economy's up
"

Would they have been wise to have stuffed piggy with golden bricks? Has Hugo Chavez caught on to that game of golden snitch? Has he reined in the El Dorado of Venezia Piccolo? Could he also be buying up Illinois Farmland that recently seems to have been appreciating like Capone Gangbusters? And what are you cleverly socking away for your timely piggy stuffing-s? Will booming land values precede improved real estate on the upswing? Are bio-tech opportunities the undiscovered parabola? U go 1st!

U go,

Hugo
!

And oddly enough, like everyone else pointed out, hoarding cash and not hiring WILL lead to a prolonged recession. We're a consumer-based economy, so it's a no-brainer that you need to create consumers (employed folks, jobs) in order to sustain profits. Just relying on other nations to buy our stuff is not working. Slashing salaries and benefits consistently for the rank and file while shifting the wealth upward will bite them in the butts. Paging Henry Ford...

This story missed the bigger issue posed by companies hoarding cash and refusing to invest it in jobs or the future: the phenomena described by Keynes as the liquidity trap Business, faced with uncertainty, hoards cash, does not hire or invest thus worsening the recession/depression. If companies can't be lured to spend with incentives such as tax cuts (a path we have tried) then tax the excess balances and the government creates jobs. Taxes don't mean that everyone has less. In fact, if taxes can increase economic activity (think of New Deal programs such as Social Security, the CCC, the WPA) then everyone wins. Harry Hopkins, FDR's man for everything, said "People don't eat in the long run, they eat every day" While business sits on cash (not a great investment with low interest rates) someone can figure out a better use. Google did it by investing in a new line of business. What are they waiting for?

It will not boost the economy. Like what papa buffett said, rich old folks are the ones living off the dividend. Most likely, they'll just reinvest. A flood of dividend will not affect people that don't own stocks. Plus there are plenty of stocks giving out big dividend already.

Imagine if they paid half of that trillion out as dividends to their share holders. Then there might just be the boost to the ecomomy that they are looking for!

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