Our venerated James A. Bacon had a recent post that had a bunch of charts (where the man gets them no one knows) that stirred quite a bit of discussion about savings and the economy.
One chart rubbed me the wrong way — one showing how much cash U.S.companies were hording. The Baconaut-in-Chief wrote: “On the positive side, U.S. business is piling up large sums of cash — the most since the 1970s.” To be fair, he did note that this wasn’t creating many jobs but it is obvious where he places his priorities.
Mr. Bacon is sort of like Mohamed or Martin Luther — the creator of a new religion. In this case, it is the faith of the “Boomergeddon” (bible to be released soon) which warns of hellfire and brimstone unless we stem our profligate ways. In this sense, hording cash is a good thing and as I open my empty desk drawer in my office I see where he may have a point.
But not really. Hording cash is killing us. This week’s BusinessWeek, my old alma mater, notes that American households are sitting on nearly $8 trillion in cash that’s earning nothing because everyone is so shell-shocked by the 2007-2008 market losses. In this year’s first quarter, non-financial U.S. firms held $1.84 trillion in cash, which is 27 percent more than in early 2007.
This is NOT good news, despite what you might hear from the High Priest. Not spending cash means that no jobs are being created. Cash cannot do what it is supposed to do — beget more wealth. BW notes shareholders are getting antsy because by hording cash, big companies are not making it work for them. Says on analyst: “Why pay a stock market multiple for a company that is essentially acting like a bank — and a bad one at that?”
For the impacts of all this, look no further than Richmond. About 25 percent of the houses in the city are in foreclosure. That’s a lot. The reason, the head of a local realtors’ group told me, is that we’re seeing the second in a wave of layoffs and tight money. The first came around 2007-2008 when the financial crisis flared and home borrowers with adjustable rate mortgages got nailed. We’re now in Wave Two which is happening because so many people have either been laid off or have been forced to take lower-paying jobs, meaning they can’t pay their mortgages any more.
The only way this downward curve can change is if jobs are being created. They won’t be unless some of that precious cash starts circulating. Even more bizarre is that mortgage rates are at incredible lows. Yet with the New Sternness applied by banks and mortgage lenders (who would loan to a dog or a cat three years ago), no one qualifies any more for a loan.
Now all you Republican yahoos out there are going to blame this all on Obama and Barney Frank’s new, sort-of-tough financial regulation law. I say to you all: “Baloney, Macaroni!” The new law hasn’t even taken effect yet. What we are seeing is those very same financial institutions (you know, the ones too big to fail) beating up on hard-working, frugal Americans as a reaction to their greedy forays into the profitable sub prime market that helped cause the crash in the first place.
And this, of course, leads us to the elemental point and flaw in the New Frugality being pushed by the Reverend Bacon and others. We’re not out of the recessionary woods. These new-found preachers are testifying to the need for discipline and belt-tightening. If you listen to these piney woods types, we’ll turn a weak recovery into a Great Depression.
What we need now is spending and releasing some of that cash. We need new trust and new ideas — not GOP-minded naysayers who will do whatever they can to vote out Democrats in November.
Beware false religions.
Peter Galuszka
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