Corporate cash reached a new record of $1.9 trillion in Q1 according to the Federal Reserve's Flow of Funds report. The figure is referenced in discussions here and here, among other places.
But what rarely seems to get mentioned in these sorts of discussions is the debt side of the equation involving all this corporate cash. To cite the growth in cash as evidence that corporations don't need a tax cut and aren't investing simply misses the larger reality which helps explain the phenomenon.
John Carney here points out among many other important considerations that corporations are behaving out of fear just like individuals had when they increased their savings in the wake of the recent financial crisis. Many businesses experienced first hand just how difficult times can be without sufficient liquidity in a situation where no one is lending. Increasing cash should be viewed in part as insuring against a repetition of a similar lending lock up in future.
Other more extenuating circumstances should also be considered when evaluating the issue of corporate cash. One is Federal Reserve induced low interest rates.
David Zeiler calls attention here to the fact that the current low cost of borrowing is too attractive for corporations not to lock in before QEII ends and the cost of borrowing inevitably rises:
The amount of debt companies have issued this year is staggering. As of May 18, companies with investment-grade ratings had issued $392 billion of bonds, an increase of 30% over the same period last year.
Another consideration is related also to formal government policy, namely that much corporate cash may simply be too unattractive to use for tax reasons:
"Many tech companies have looked to raise capital in the [U.S. debt] market over the past year, for a multiple of reasons, including acquisitions, the maturing of businesses and the inability to tap offshore cash without tax consequences," Keith Harman, a managing director in debt capital markets at Bank of America Merrill Lynch told Reuters.
The issue of offshore cash is a significant one. For many companies, offshore money accounts for the bulk of their cash. About 46% of Google's cash is overseas; 90% of Cisco's and virtually all of Microsoft's.
Because of a reluctance to pay the 35% U.S. corporate tax on that money, that cash remains offshore and unavailable for many uses, such as stock buybacks and infrastructure investment. (Microsoft used some of its offshore cash to buy Luxembourg-based Skype earlier this month.)
This suggests that repatriating corporate cash should be a fundamental goal of tax reform in the US. That would mean making it more attractive to keep it here by reducing corporate tax rates.
Come to think of it, why stop there? Why not patriate everyone's cash in the world to America as a matter of formal government policy?
The more cash, the better.
