8/15/2023 0 Comments Cash stockpile meaningThere is no need to hoard $1.6 trillion for purely transactional purposes. However, only a small amount of cash is required for this purpose. Excess cash allows the firms to be self-sufficient and avoid the resultant stress. The fact that recession may just be around the corner gets a lot of companies worried about their finances. This allows them to be less dependent on banks and other financial institutions. If companies are afraid that they may not be able to raise funds when needed, they tend to hoard cash. Why are American Companies Holding this Cash?Īccording to economic theory, there are only two reasons to hold on to cash: Hence, it would be fair to say that American multinational corporations are withholding the growth of thousands of small businesses worldwide. When the velocity of money reduces, the result is seen in slower GDP growth. By holding on to huge sums of cash, these corporate giants are preventing the circulation of cash and reducing the velocity of money. The stockpiles of cash being held by Amazon or Apple could be used by small businesses to meet their liquidity needs. However, hoarding cash is bad for the overall economy as well. Therefore, normally, companies do not hold much cash since it depresses their own return on equity. In some cases, the yield may even be negative. If cash is held in a savings account or a money market account, the yield is negligible. The problem with cash is that in the short run, the yield is abysmal. This is because if a company is holding a lot of cash, it means that the company is holding less of other assets. Huge cash piles have traditionally been considered to be a problem for the company holding them. However, that does not seem to make too much of a difference since non-financial firms account for $1.6 trillion of this cash pile. Hence, in order to be fair, it is important that only the cash holdings on non-financial firms are being considered in this article. It is not unusual for financial firms to hold on to a lot of cash. The Problem with Piles of Cashįinancial and non-financial firms hold cash for very different reasons. In this article, we will try to understand why American corporations are holding on to piles of cash instead of investing it. This excessive hoarding of cash in unparalleled in financial history and hence has left a lot of economists flummoxed. Corporate America is flush with cash! Collectively, the Amazons, Apples and other such publicly traded mega corporations account for close to $2 trillion in cash.
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