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Two Trillion Pound Elephant in the Room

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Evan Stephen Posted: Wed, Jun 27 2012 11:20 AM

 

There is a subject that the Austrian camp seems to be dodging.  U.S.  corporations are holding something like 2 trillion dollars in reserve. That has to be a very bullish thing for the economy.  These CEOs and corporate board members are likely waiting for Obamacare to get struck down, or for the next administration, and congress to repeal it, along with Dodd/Frank.  I know that folks in the Austrian School are very pessimistic about the economy, and much of it is for what I agree is good reason, but why are they ignoring this 2 trillion pound elephant? Is this 2 trillion dollars included in TMS (True Money Supply).  If so, wouldn’t that take a lot of steam off of the inflation scare?  It would seem reasonable to regard this huge pool of money as real savings.  They didn’t just create it out of thin air, as does the Fed.

I have emailed a few Austrian authors, and I greatly appreciate them responding to me, but the most I ever got was a couple of sentences worth of, basically, brush off.  Why are there no full length articles addressing this?  Is it because folks in the Austrian camp are *hell bent* on being negative, and all these cash reserves fly in the face of their pessimism on everything else?  Is this an awkward, and uncomfortable fact that doesn’t fit in with their agenda?  I have such great admiration for everyone in the Austrian vein, I don’t know if I am more disgusted, or disappointed.  I might understand them ignoring this phenomenon if this was small potatoes, but 2 trillion dollars???  Like they say on Monday Night Football, …… Come on man!!!

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Autolykos replied on Wed, Jun 27 2012 11:24 AM

Evan Stephen:
There is a subject that the Austrian camp seems to be dodging. U.S. corporations are holding something like 2 trillion dollars in reserve.

Source(s) please?

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lazarus351 replied on Wed, Jun 27 2012 11:50 AM

I'm not as well read as many, but this is the article I'm aware of that addresses this the most.

 

http://mises.org/daily/3554

 

 

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McCulley's point is correct, as far it goes, but it's hardly a long-term fix. As I pointed out elsewhere, at best this "solution" (and the related one, of letting the Fed issue its own bonds) postpones the day of reckoning. The basic problem is that (at some point) the huge glut of excess reserves will start fueling expansions in the money supply, and hence price increases. Paying interest on reserves simply amplifies the problem, and exponentially at that. When the Fed "pays interest" on reserves, it doesn't offer to cut lawns or babysit for the bankers in question. No, it pays interest by further increasing the banks' reserves on deposit with the Fed.

The Fed inflation targets regardless to negate that sort of troll logic. Reserve rates are lowered, and interest rates raised, in the process of meeting the target regardless of what happened last week or last decade. The more banks use their excess reserves to stoke inflation, the higher the Taylor Rule pushes the interest rate. In the restaurant analogy, it's like setting out mousetraps with the meal.

As an aside, it's ironic when Schiff types claim that low rates are forming a bubble now while raising interest rates is, if anything, often given as a solution to attracting foreign investment and reflating housing.

Anyway, I'm going to laugh my ass off when Bill Gross and PIMCO (a Ron Paul supporter, to boot) buy up what's going to be left of Euro Pacific.

There are several things wrong with this. First, it ignores the fact that interest rates are prices and they really mean something about scarcity and individual preferences. The Fed doesn't "stimulate" the economy by pushing down interest rates, all it does is screw up the market's attempts to rehabilitate itself after a boom — which itself was fueled by previous Fed attempts to push down interest rates and "stimulate" the economy.

With 8% unemployment, there doesn't seem to be a scarcity of capacity. Those individual preferences keeping the economy in recession are liquidity preferences resulting from self-fulfilling adverse expectations. The article doesn't claim to have a way to put the trillion pound elephant bank to work- it just insists that doing nothing is better.

People may be surprised to learn that the Federal Reserve cut interest rates down to (then) record lows following the 1929 stock market crash as well. Herbert Hoover established the Reconstruction Finance Corporation to bail out financial institutions that had made bad loans during the late 1920s boom.

Sure, but that ignores the huge increase in the real interest rate as deflation was crashing the economy. The Fed used open market purchases in 1933 to start the recovery when they realized this wasn't working.

Anyway, I don't like QE for other reasons (exchange rate volatility), but just pointing all that out.

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http://www.europac.net/commentaries/corporate_cash_myth

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Posted something here- where did it go?

Long story short, inflation targeting prevents the kind of troll logic in the Mises article from causing infinite inflation. The Fed can raise fund rates and lower excess reserve rates as excess reserves push the Taylor Rule either way.

Interestingly, the second article presents an argument as to why the Fed should keep interest rates low anyway, ie "print money".

The death blow to US corporations could come when US interest rates rise to historically normal levels. A four-percentage-point rise in the interest rates paid on debt by US corporations would cost them nearly $300 billion per year in additional interest costs. That amounts to 17% of corporate profits for all of 2010. When faced with rising interest costs that cut into profits, companies will likely look to cut expenses in all areas, including labor. This could start a vicious cycle of corporate cutbacks, declining household income, reduced aggregate demand, and slowing production, which would start the cycle all over again.

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Troll logic? Pot, kettle.

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Evan Stephen:
There is a subject that the Austrian camp seems to be dodging.  U.S.  corporations are holding something like 2 trillion dollars in reserve.

Peter Schiff has talked about this, so yeah. (I'm sure JJ could dig up a link to this.)

I know that folks in the Austrian School are very pessimistic about the economy,

The value-free issue aside, as Jesus Huerta de Soto pointed out in a recent speech, the bust is when the malinvestments are cleared.

[...] their agenda?

Agendawhat?

I have such great admiration for everyone in the Austrian vein,

Why?

To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process.
Rabbi Lapin: "Let's make bricks!"
Stephan Kinsella: "Say you and I both want to make a German chocolate cake."

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Daniel Muffinburg:
I have such great admiration for everyone in the Austrian vein,
Why?

It might have something to do with their irresistible sense of style.

 

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Bogart replied on Wed, Jun 27 2012 5:25 PM

Assuming that there is this pile of cash, which I doubt then

There are a few non-Austrian simple reasons for corporations to hold large amounts of cash:

1. The firm is waiting for prices to increase that must logically follow the increase in money supply.

2. The firm is waiting to acertain the true cost of these stupid ideas like Obamacare and tougher regulations on the business environment.

3. The firm prefers cash to other methods of savings like near zero percent short term bonds, high-yield (High Default Risk) corporate and municipal bonds, financial stocks, mortgage backed securities, etc.

Austrian reasons for firms holding large amounts of cash:

1. The managers of the firm want to (Prefer) retain an amount of real wealth in the form of currency,  but the Fed has doubled the true money supply so the nominal value of their cash holdings is now half so the company must double the amount.

2. The managers have changed their preferences for holding cash in reaction to changes in their business environment.

3. The managers of the firm do not believe that the new money created by the Fed is really new savings and there is a collapse coming at some future time.

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Anenome replied on Wed, Jun 27 2012 7:22 PM

When there's significant legislative or tax uncertainty, businesses are less willing to invest or hire. This results in a build-up of cash reserves. This is nothing new, and I'll take his statement on that basis.

That doesn't mean anything unusual is going on. It's always been that way. Two trillion sounds like a bigger number than I would expect, but considering small businesses probably make up much of that, perhaps it's right.

Autarchy: rule of the self by the self; the act of self ruling.
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