Previous Corporate Hoarding Of Cash May Soon Become A Big Positive!

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For a number of years politicians and analysts have bemoaned the fact that
U.S. corporations were hoarding cash to an unprecedented degree, refusing to
invest it for future growth that might have helped the economy recover from
the back-to-back recessions of 2001 and 2008. Lagging business investment
has continuously been tagged as one of the major factors stifling the
economy.

Depending on whose numbers you believe, corporations are sitting on a record
$2 trillion to $4 trillion in idle cash, earning only today's minimal
interest.

Not satisfied with cash accumulating from earnings or by selling off
underperforming divisions, many corporations have taken advantage of the
record low bond yields to raise still more cash by issuing bonds, additional
cash they don't put to work either.

Of course everything these days must be painted with a political brush. So
liberals pin it on corporate greed, while conservatives blame it on
corporations being scared off by government regulations and an anti-business
administration.

But corporations operate in the real world of the economy. 

And the U.S. economy, indeed global economies, came extremely close to a
catastrophic meltdown into a second Great Depression in 2008. Anyone with
even rudimentary knowledge of the first Great Depression is aware of the
thousands of companies, including seemingly impervious giant corporations,
that ran out of cash and did not survive.

Unusual threats called for unusual action.

So both the Bush and Obama administrations determined that whatever it took
in the way of stimulus and government spending to try to rescue the economy
from another Depression would be better than the alternative if efforts were
insufficient.

And corporations determined there was no way they could have too much cash
in such an event, and so it was a time to forego R&D of new products and
modernization of plants and equipment and hoard massive amounts of survival
cash in case the government's efforts did not work. 

Now fast forward to the present.

Government efforts have not returned the economy to boom times. But wasn't
it obvious that the worst recession in 80 years, taking place while the
country was already mired in big budget deficits and rising federal debt
created by two costly wars, would be difficult to turn around? In fact the
majority opinion five or six years ago seemed to be that the massive rescue
efforts couldn't possibly work for a variety of reasons.  

But progress has been made and continues. The stock market has been a
believer, and has already returned to its level of 2007. And in the economy,
the devastated financial and auto sectors that needed unprecedented bailouts
and loans to survive, have recovered and most have already repaid the
bailouts and loans, with interest. 

Scary stumbles in the recovery took place in the summers of 2010, 2011, and
2012, each of which prompted additional stimulus action from the Fed. But
each time the recovery resumed and reached a new plateau from which to base
and make further progress.

Most recently it's become clear that two of the Fed's remaining major
concerns, the housing industry and job growth, are making impressive
progress. Home sales, new housing construction, and home prices have
recovered to levels not seen in several years. Job losses of 300,000 and
more monthly a few years ago slowly reversed and averaged monthly gains of
150,000 in 2012.

What's it all mean?

Impressive progress has been made, but there's obviously further to go.

It's my expectation that the economy and stock market face one more setback
at some point, which will be created by the next step in returning to
normal, the belt-tightening austerity measures that will have to be imposed
on the country to tackle the major remaining problem - bringing down the
record government debt level.

However, the next set-back is not likely to be anywhere near as severe, and
that hoard of corporate cash is one reason for that expectation.

Corporations plan ahead. No longer focused on the need for dramatic hoarding
of cash to survive a potential 2nd Great Depression, even in a temporary
setback created by government belt-tightening, corporations will be able to
see the light at the end of the tunnel, and begin investing for growth
again, spending some of that cash hoard in preparation for better times
ahead.

 Loosening even a portion of that $2 to $4 trillion cash hoard would go a
long way toward offsetting the Fed halting its $80 a billion a month of QE
stimulus, and the government tightening its belt in an effort to cut the
budget deficit by $2 trillion over the next ten years, which seems to be the
approximate goal of both parties.

Is this the ranting of an eternal optimist? Not hardly. As my subscribers
and readers know, there was no one more bearish and pessimistic in 1999,
prior to that collapse, or in 2007 and 2008. And expecting another setback
at some point for the economy and market, as a result of the necessary
austerity measures coming our way, can hardly be characterized as blind
optimism.

But there are reasons to believe we're in the 8th inning of the recovery. 

And that hoard of corporate cash that has previously been a drag on the
economy is quite likely to soon begin providing a positive impetus that
shortens the length and depth of the next setback and gets us closer to full
recovery. (That in turn would significantly increase government tax revenues
and make paying down the debt load that much less of a burden. But let's not
get too far ahead of the current situation). 

Sy is president of  <http://www.streetsmartreport.com/>
StreetSmartReport.com., and editor of the free market blog

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avatarSy Harding - Street Smart posted Saturday, January 19th, 2013.

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