Why companies are still hoarding their cash
Like the rest of us, companies are still uncertain of the economic future. But spending and investing could help to push the economy forward.
Jeremy Hobson: Fed Chairman Ben Bernanke didn't give any hints of quick action to boost the economy when he testified on Capitol Hill yesterday. Of course, the main thing the Fed can do is reduce the already low cost of borrowing. It can't force companies to go out and spend. And according to Ernst & Young about 2,000 of the largest companies in the U.S. and Europe are still hoarding more than a trillion dollars in cash.
Marketplace Economics Correspondent Chris Farrell joins us now to discuss. Good morning.
Chris Farrell: Good morning Jeremy.
Hobson: What are these companies waiting for, Chris? Why are they hoarding all this cash still?
Farrell: The same reason why you and I and lots of our listeners are trying to hoard cash. There's all this uncertainty. And cash is the best hedge against uncertainty. You don't know: Are we going to fall back into recession? Are we going to have another global economic crisis? Will the U.S. march off the proverbial fiscal cliff come 2013? Companies are getting a little bit nervous, might as well hold on to that cash.
Hobson: But we've hearing about uncertainty now for four years, since the financial crisis. You'd think at some point, uncertainty sort of becomes certainty of uncertainty, and people start to do things again.
Farrell: You're absolutely right. American Express did a survey back in February of global CFOS, and asked them lots of questions about their cash. Back then, they kind of captured the sense of a moderate economic recovery, and 45 percent of the CFOs said they had plans to spend down their cash. That compares to 62 percent the previous year -- same survey -- said they had a cash preservation strategy. So I think you're right, but right now, there's almost a rational panic, Jeremy, about the eurozone and what's going to happen with the eurozone. So I think everyone's sort of pulling back a little bit, and maybe we do want to spend some of this money, but just not yet.
Hobson: OK, well when they do decide to go out and spend this money, these companies, what's going to be the impact on the economy?
Farrell: Look, the impact is going to be good for the economy. I think it'll essentially support the story of a moderate economic recovery, not a rousing economy, but a moderate economic recovery. So what the CFOs said they were going to spend the money on is research and development, software, information technology, things to make their companies more efficient -- and hiring. So taken altogether, it would be good news if we get past this period of uncertainty.
Hobson: Marketplace economics correspondent Chris Farrell. Thanks a lot.
Farrell: Thank you.