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Corporate cash hoard represents untapped potential for the economy

October 04, 2010

| MoneyRates.com Senior Financial Analyst, CFA

It seems the Fed got it half right.

Corporations are taking advantage of super-low interest rates to issue bonds at little cost to themselves. Unfortunately, they are hoarding rather than spending the resulting cash.

The best laid plans of mice and Bernanke

This isn't exactly what the Federal Reserve had in mind when it engineered today's extremely low interest rates. The idea was for corporations and individuals to borrow and spend, thus stimulating the economy.

Instead, individuals have taken the opportunity to pay down debt. This may not be entirely a matter of choice -- banks are reluctant to lend -- but in any case the effect is that individuals are paying off old bills rather than racking up new ones.

In contrast, corporations are issuing bonds -- which is a form of borrowing -- but they are using the cash they raise to build up war chests instead of investing it in expansions that would create new jobs.

According to an article in the New York Times, this year the average corporate cash hoard reached the highest level since 1964. Cash as a percentage of corporate assets has risen steadily over the couple years, and is now over 6%. In dollar terms, that's $1.6 trillion. Imagine what a stimulus that would be if corporations put more of it to work.

Instead, corporations are biding their time, shoring up balance sheets, buying back stock, and contemplating acquisitions. All uses for cash that do not pump money into the economy.

Depositors suffer from low savings, money market rates, etc.

The New York Times article also points out something that has been a recurring theme at MoneyRates.com: that low interest rates may actually be taking some money out of the economy. The average rate on savings accounts is 0.18%, according to FDIC figures. Money market rates average 0.26%, and CD rates range from 0.16% to 1.72%, depending on the length of term.

These low rates mean less income for savers -- people who might actually be willing and able to spend their money. Perhaps it's time for the Fed to re-think its low interest rate policy.

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