Tuesday, January 05, 2016

Why Are the Largest Corporations Sitting on Trillions in Cash?


As the value of money rises, the value of things goes down, and vice versa (illustration by Constance Heffron, Happy Days, 1951, Allyn and Bacon; source).

by Gaius Publius

Why are the world's largest corporations sitting on trillions in cash? Thom Hartmann's answer is — they know a crash is coming.

The Relationship Between Money and Things

Before we look at Hartman, however, let's consider the relationship between "money" and "things." Money and the things that money buys are, by definition, on opposite sides of a kind of see-saw or teeter-totter. When "things" (goods, commodities, services) become more valuable — when their side of the teeter-totter rises — they cost more, and it takes more "money" (dollars) to buy them. That automatically means the value of money goes down, since it take more of it to buy something that used to cost less.

As a concrete example, if the price of a loaf of bread goes from $1 to $2, two things always happen — bread becomes more valuable (it costs more) and a dollar becomes less valuable (it buys less). This is a literal inverse relationship, unlike a lot of false inverse relationships you hear about (for example, less government = more freedom and vice versa.)

Most of us are used to a world in which money slowly becomes less valuable; in fact, this is the "normal" world most of the time. The cost of goods goes slowly up (we call that "inflation"), and the value of the dollar goes slowly down. We've been in this kind of world, an inflationary world, since the Great Depression ended.

The opposite is a period of "deflation," in which the cost of things goes down (often suddenly and drastically) and the value of money goes correspondingly up (often way way up). In that world, the cost of a loaf of bread falls from $1 to perhaps 50 cents; at the same time, one dollar becomes twice as valuable. Deflationary times are associated with "hard times," the Great Depression, for example, because falling prices are usually associated with times when people just can't afford things at "normal" prices because they're just too poor. If a baker just can't sell bread for $1 per loaf, she'll sell it for whatever folks can afford, and the price will fall.

 When only the rich have money, spending slows and prices collapse.

Now do a thought experiment, and as you do, keep the teeter-totter relationship between money and things in mind. In "good times," would you rather be rich in things or rich in cash? Things (goods), of course, since in inflationary times the value of things keeps going up and the value of money (cash) keeps going down.

So what would you rather hold in "hard times," or if you thought hard times were coming? In "hard times" I want to hold cash and buy only what I need. Why? Because in deflationary times, cash increases in value while the price of things keeps falling. (In fact, in my very small way, I've been mainly "invested" in cash since before 2007 and plan to remain that way. I'm sure many of you are as well — something to remember as you read on. You're not the only ones with that idea.)

One last thought. Consider debt in good times and bad. Most people will tell you, correctly, to hold less cash and more debt in good times, since you borrow a dollar that's worth $1 at the time, then pay it back with a dollar that's worth, say, 95¢. A pretty good deal, right? But debt in bad times is a very bad idea, because the math now works against you. You borrow a dollar that's worth $1 at the time, but you have to pay it back with a dollar that's worth $1.05, or worse, and that's before you add in the interest.

Bottom line: If you think hard times are coming, hold the most cash and the least debt you can. Now on to Hartmann and something he wants to point out.

Thom Hartmann and "The Crash of 2016"

In his terrific book, The Crash of 2016, Thom Hartmann identifies something you've likely heard about but haven't given much thought to. Modern mega-corporations are hoarding cash. Hartmann from Chapter 11 (my emphasis, so you notice how large the numbers are):
If you want to know which way the wind is blowing, keep an eye on the billionaires.

So what are the billionaires telling us just ahead of the Crash of 2016?

Well, in 2012, four years before the Crash of 2016, Moody’s Investors Service noted something peculiar. It noticed American companies are hoarding record amounts of cash.

For example, in 2012 Apple was discovered to be sitting on $137 billion worth of cash. Investors actually sued the company to make it pass some of that wealth down to shareholders.

But what Apple was doing was comparatively minor. Altogether, US companies stashed away $1.45 trillion in cash in 2012, a 10 percent increase from 2011.

They aren’t investing it, they aren’t expanding their businesses with it, they aren’t hiring more workers. They’re just sitting on it. They aren’t even paying taxes on it, since, as Moody’s discovered, 68 percent of all that cash is stashed overseas.

Wall Street is also hoarding enormous amounts of money. Dan Froomkin at the Huffington Post explained in July 2012, “The latest report from the Federal Reserve shows that big banks’ cash reserves peaked in the third quarter of 2011, but are still near their all-time high at just under $1.6 trillion—an astonishing 80 times the $20 billion they held in reserve in 2007.”154

But it’s not just in the United States; it’s all around the world.

The Wall Street Journal wrote on Europe’s banks holding cash at the end of 2012: “A dozen of Europe’s largest banks reported holding a total of $1.43 trillion of cash on deposit at various central banks.”

It adds, “That represents at least the sixth consecutive quarter that the banks have increased their overall central-bank deposits. Since the end of 2010, the banks have boosted the amount they are stockpiling at central banks by 84%.”155

The Institute of International Finance, a Washington-based organization, calculated that companies in the United States, United Kingdom, Eurozone, and Japan were sitting on nearly $8 trillion worth of cash.156

Altogether, the wealthiest people on the planet have as much as $32 trillion stashed away in overseas financial institutions, according to a study by the Tax Justice Center in 2012.

All of this is taking place just as the stock market was reaching historic new levels, and profits in corporate America reached the highest levels as a percent-of-GDP ever recorded. Yet, in early 2013, Money News reported that “a handful of billionaires are quietly dumping their American stocks,” including Warren Buffett, John Paulson, and George Soros. ...

If the economy really is doing so well, then why are the wealthy giving signs of the opposite, quietly leaving markets and just sitting on the sidelines?

The answer is they know what’s coming. They know 2008 was just the precursor, and 2016 will be the real catastrophe.

The billionaires are preparing for a series of economic shocks on the horizon, probably beginning in Europe and spreading across the planet ...
Is a great crash coming in 2016? Predicting the future is almost as hard as predicting the past (just ask a historian), so I don't claim to know if Hartmann is right about the timing. But I do know that a crash is coming, and I'm by far not the only one saying so.

Do the rich know something we don't? They may not notice when torches and pitchforks reach critical mass, but I'll bet they do know about economic crashes ... sometimes. Something to think about.


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At 10:58 AM, Anonymous Kurt said...

If equities are coming down out of a topping pattern and are poised to decline during 2016, and if treasury bonds are in a topping pattern of their own, then the U.S. Dollar will be one beneficiary of a flight-to-safety reaction. My firm's technical analysis suggests the Dollar Index should rise into 2017 (not necessarily starting right now), and later it could also go for an extended upward wave into 2020.

At 12:40 PM, Blogger KC said...

In the case of Apple specifically, nearly 90% of its cash is offshore. They won't bring it back because it would be subject to a repatriation tax. I wouldn't be surprised if that's true for many of these large global corps.

At 8:32 AM, Anonymous Anonymous said...

as noted above, it might be a little more complex than stated. While the megarich certainly do hoard cash, it might not be SOLELY because they see a great crash coming... unless they intend to CAUSE such a crash, which is certainly possible.

So much cash has been hoarded overseas because they have no reason to repatriate it and certainly don't want to pay tax on repatriated cash. Demand is still low due to nobody below the top .1% being able to buy anything but the essentials. Oil is so cheap that an ocean of it is stored waiting to be processed to satisfy demand that just isn't there.

If another crash occurs, especially a deflationary crash, which the 2008 event was prevented from becoming, government might not be ABLE to prevent deflation as they are in debt so much by handing borrowed cash to the ultra-rich. As deflation occurs, the hoarders' stashes become bigger... but how pissed will the nearly 7B humans be as they get hungrier and colder while the kochs of the world demand more and more from them?

Will the next crash end up with the heads of the .1% on pikes? Or will the 99.9% just take it like usual?

At 9:30 AM, Blogger Tara Unverzagt said...

Interesting blog and I've been thinking along the same lines. The problem with sitting on cash (banks and investment companies are doing it also) is that that money is out of circulation. So it's not $1 in cash being saved and $1 out of circulation, but $1 times the volicity of money out of circulation. And that multiplier is getting lower and lower, now down to a level not seen since 1970s, which makes the problem worse and worse. Do you remember the 70's? Not good!

Everyone is waiting for the sun to come out before they invest, but the sun is never going to come out if SO much cash is on the side line. In the long run, I don't see how this doesn't effect EVERYONE, 100% of the world's population.

As for where the cash is parked, it doesn't really matter. Cash out of circulation is cash out of circulation. If the cash that's aboard were spent aboard, the world's money velocity would go up and much of that would flow back to the US.

Everyone would be better off long term if the money were put back into circulation. But it's like a game of chicken, who's going to go first and take the chance of being the only one to move and thus potentially failing. We live in such a herd mentality these days. We're going to end up being Lemmings with a similar demise.


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