American corporations have a record $2.1 trillion in cash on their balance sheets this fall. One point of view is that this is terrible: these companies deliberately must be extending the economic issues by not spending cash on creating jobs. But this point of view makes no sense when you compare it to corporate behavior over time.
Companies normally have deployed cash in the manner they see as the most logical way to create value. Cash can be used to invest in capital equipment to expand output, new stores to drive sales and market share, acquisitions to expand market share or diversify, share buybacks, etc. But companies only will take these actions if they can generate an acceptable return. If companies are not investing their cash, they must not believe they can generate the return. So then why not just pay the cash to owners as dividends? Evidently, they believe they may need the cash for something in the future and hence are not distributing it to shareholders. Two possibilities come to mind. First, perhaps they believe that the economy is going to get worse and they may need to cash to operate and hence they’re holding onto it. The second possibility is that they believe other sources of funding including bank loans may not be available whether or not the economy improves.
Either of these alternatives or both together explain the accumulation of cash on the balance sheet of U.S. companies. Weighing on their views are the debt and currency crises in Europe, inflation in emerging markets, increased investment in gold and other hard currencies, banks reserves, underlying asset valuations, current and future potential government policy, and economic malaise here at home. It’s hard to justify investing cash in jobs when you’re worried about that many things impacting your business and the economy, and you need to ensure you’ll have enough cash to survive.
What does this mean for small businesses? Conserve cash. Cut costs, be conservative about investment payout assumptions, and wait for signs of economic rebound before deploying scarce resources.
http://www.taxfoundation.org/blog/show/27796.html
— Steve Odland