THE GREAT CORPORATE CASH-HOARDING CRISIS

Everything wrong with our economy in just one article. Funny how you will not read this on any MSM outlet in America. It is sad I have to get my financial news from Al-jazeera. There is no hiding the results of this corporate hoarding. Money has to be distributed into local economies to create jobs and infrastructure.

From Al-Jazeera America

by @DavidCayJ

Cash

 

 

Large companies are their Benjamins into the corporate equivalent of a mattress.Comstock/Thinkstock

A troubling change is taking place in American business, one that explains why nearly five years after the Great Recession officially ended so many people cannot find work and the economy remains frail.

The biggest American corporations are reporting record profits, official data shows. But the companies are not investing their windfalls in business expansion, which would mean jobs. Nor are they paying profits out to shareholders as dividends.

Instead, the biggest companies are putting profits into the corporate equivalent of a mattress. They are hoarding what just a few years ago would have been considered unimaginable pools of cash and buying risk-free securities that can be instantly converted to cash, which together are known in accounting parlance as liquid assets.

This is just one of many signs that America’s chief executive officers, chief financial officers and corporate boards are behaving fearfully. They are comparable to the slothful servant in the biblical parable of the talents who buries a fortune in the ground rather than invest it. Their caution, aided by government policy, costs all of us.

Offshore hoarding

This rising sea of liquid assets holds back economic recovery in at least two ways.

First, the economic engine sputters when profits are not recycled through the economy — when they are not invested in new plant and equipment, not spent on research and development, not paid out as higher wages or larger dividends. The flow of funds between buyers and sellers, employers and workers, companies and their investors is the fuel required to rev up the economy.

Congress understood this in 1909, when the corporate income tax was adopted. Worried that companies would become bloated with cash, slowing the economy, Congress put a stiff 15 percent penalty tax on excessive pools of cash. Thousands of small business owners who have hoarded cash have had to pay that penalty over and above their taxes.

But in 1986 Congress changed the rules, retaining the penalty tax on domestic cash hoarding but allowing multinationals to hold unlimited amounts of cash so long as they sent the money offshore. This act incentivized the enormous world of offshore tax avoidance we see today, as chronicled in my book “Perfectly Legal” and other books such as Nicholas Shaxson’s excellent “Treasure Islands.”

Second, the accounting techniques American multinationals use to siphon profits out of the U.S. delay their taxes for as long as they wish, shifting tax burdens to everyone else, which thereby puts a damper on the overall economy.

This siphoning of profits out of the United States cost the Treasury between $57 billion and $90 billion in 2008, Kimberly Clausing, an economics professor at Reed College in Oregon, estimated after analyzing corporate disclosure statements.

Cash sent offshore cannot be invested in expanding American operations. However, Congress does permit the money to be used to buy federal debt — Treasury notes and bonds. More about that in a moment.

My analysis of the latest data from the Federal Reserve, the IRS and corporate reports shows that American businesses last year held almost $7.9 trillion of liquid assets worldwide.

Corporations hold liquid assets equal to all the money the federal government spent in 2013, 2012 and three months of 2011.

Those who follow the news may be surprised, because the figure that’s been mentioned lately has been just under $2 billion. That figure, which comes from the Federal Reserve, is only for domestic cash. The Fed makes its calculations (from the latest Flow of Funds report) using IRS worldwide data after subtracting offshore money.

My estimate is conservative. I did not count cash due to American companies from their offshore subsidiaries as accounts receivable because the IRS does not provide fine details on these additional trillions of dollars.

But even my $7.9 trillion estimate is so huge that it may be difficult to understand, so let’s review some ways to put it in perspective.

Consider the debate over federal spending. Uncle Sam spent $3.5 trillion in fiscal 2013. Corporations hold liquid assets equal to all the money the federal government spent that year plus 2012 and three months of 2011.

The cash hoard also equals all the sales rung up by all 6 million American businesses every three months. And four years of 2013 profits, which totaled $1.9 trillion.

Corporations now hold $2.30 for every dollar of cash they had in 1994, after adjusting for inflation.

The total corporate cash reserve also amounts to almost $25,000 per American, up from $13,000 per American in 1994 (again after adjusting for inflation). And this cash is highly concentrated, most of it held by the 2,800 biggest companies, IRS data shows.

Since 1994, liquid assets have grown at about six times sales, my analysis of the official data shows. When liquid assets grow six times faster than revenues, it tells you that companies are hoarding cash, not investing or spending.

Turning taxes into profit

These facts also demonstrate that America’s CEOs, chief financial officers and corporate boards fear the future because instead of investing their cash they hold onto it. But even if cash hoarding comforts weak-kneed executives, it makes no sense for investors, workers or taxpayers.

Investors do not need a company to hold their extra cash. That’s what savings accounts are for.

Workers need companies to invest in the future, replacing old factories, purchasing new equipment and engaging in other activities that employ people in pursuit of bigger future profits.

Taxpayers also get a terrible deal. When companies siphon cash out of the country it reduces their immediate federal income taxes. Congress spends the money anyway, which requires borrowing. Companies then loan Washington the money they did not pay in taxes, collecting interest.

This means companies that do this turn a profit on their taxes. Consider a company that defers a $1 billion tax for 30 years, using the cash to buy federal debt paying 4 percent interest in an era of 3 percent inflation. The company will collect more than $2.2 billion in interest, while inflation will erode the value of the tax to $401 million, a nearly 60 percent reduction. From the government’s point of view the tax is converted from a source of revenue into an expense.

In the parable of the talents (Matthew 25:14–30), the returning master praises two servants who invest the fortunes entrusted to them, earning big gains. But the servant who buries the gold and merely returns it is denounced as “wicked and slothful” and is cast out.

Corporate executives and directors who hoard cash are modern slothful servants. If we want jobs, wealth, lower taxes and a prosperous future, they should also be cast out.

Corporate Cash Flow
Dividends to shareholders, shown in red, have not grown nearly as much as cash flowing into corporate accounts, shown in blue.

David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal“, “Free Lunch” and “The Fine Print” and editor of the forthcoming “Divided: The Perils of Our Growing Inequality.”

The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera America’s editorial policy.

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card802
card802

Depressing, just absolutely fucking depressing.

Going to hit the bottle, again.

llpoh
llpoh

I see three things that are driving cash hoarding. Each of them is logical and rational from a business standpoint.

First, the US has the highest corporate tax rate in the world. If the money is brought into the US, huge tax liability will be crystallized. Businesses do not want to lose 35% or 40% or whatever of their cash to taxes. It is a logical and rational position. If the govt wants the benefit of some of this money to flow, the corporate tax rate needs to plummet. I believe there should be no corporate taxes, asit is contrary to promoting investment in business.

Second, I believe that it is likely that CEOs/boards believe that economic circumstances are such that they fear any investment they make has a strong likelihood of disappearing entirely. So the deem it preferable to see their cash devalued by inflation rather than disappear entirely when the economy totally craters.

Third, I believe that there is an expectation that the economy will crater, and that the belief is that hard asset prices will plunge even while consumer inflation remains high. Plunging asset values will offer once in a lifetime buying opportunities for cashed up corps.

Their position is totally logical and rational.

Any attempt to force them to “invest” the cash will be met with extreme resistance and will most likely fail. The CEOs and boards will rightly conclude it is similar to forcing someone to commit suicide. If they invest the cash, it will disappear. If absolutely forced, they will return the cash as dividends to the owners, who will themselves hold it as cash. The money WILL NOT BE INVESTED in the current circumstances. No matter what may be attempted to force the investment of the cash, it will not work. CEOs/astute individuals will simply not flush the entire cash hoard down the toilet.

llpoh
llpoh

One other thing that is happening – because interest rates are so low, corps are finding it cheaper to keep profits overseas/send profits overseas and borrow rather than pay the taxes on the earnings.

So there is another way that the US is getting screwed by the ridiculously low interest rates.

llpoh
llpoh

Steph – the money is not outside to be secured against inflation.

The money is being held in US dollars – almost 100% – so it is not protected against inflation. It is overseas so as to be protected against the absurd S corporate tax rate. The money is generally “invested” in US treasuries and the like in the US, but is deemed to be held overseas.

The corps are being hit by inflation, which they prefer to losing their money entirely via taxes and via investments where they see too much risk and not enough return (ie. they see far too much risk in investing in the US). They are also waiting buying opportunity.

llpoh
llpoh

By the way, I am not just guessing re the money being held in US dollars. That is established fact. The reason it is held in US dollars is to protect it against exchange rate fluctuations and a few other anomalies.

Anonymous
Anonymous

Al-Jazeera America is going on an ad blitz for increased viewers. With so many different sources for financial articles I wouldn’t give Al-Jazeera the sweat off my heels.

El Gordo
El Gordo

Anonymous says:

“I wouldn’t give Al-Jazeera the sweat off my heels.”

Anon, the correct phrase is: I wouldn’t give Al-Jazeera the sweat off my balls.

I hate the new English, everything is so fucked up. I know I have mentioned it before: using the phrase ‘speaks to’ instead of ‘addresses’.

Anonymous
Anonymous

BTW Al-Jazeera America towel heads have worse ratings than al gores Current TV!

Imagine that!

How far down the bottom of the barrel is SS going to dig? LOLZ

Anonymous
Anonymous

Alot of the money ended up, because some corporations became bank holding companies, on the federal reserves interest paying (deposits) accounts.

Accounting gimmicks

Anonymous
Anonymous

I hate the new English -EL (God) Gordo (Obese)

Well, overweight one, perhaps you will learn to hate AWD

Anonymous
Anonymous

Folks allow me to introduce you to the God of Walmart

El Gordo.

Soon to be seen on wrestling channels pinned down by Paris Hilton

El Gordo
El Gordo

Anonymous says:

“I hate the new English -EL (God) Gordo (Obese) Well, overweight one, perhaps you will learn to hate AWD”

Uh, Anon, it is I, juan. I’m just using a moniker my buddy Billy gave me.

El Gordo
El Gordo

And, ‘el’ in Español simply means ‘the’. not the same usage as El Shaddai, El Elyon…

El Gordo
El Gordo

El Gordo also refers to the biggest lottery prize. The big one, like my dick, capiche?

llpoh
llpoh

“El Gordo also refers to the biggest lottery prize. The big one, like my dick, capiche?”

So, if the Mexican lottery is akin to Coyote’s dick, then the grand prize must be, what, $1.50?

Wonder how many pesos that is.

crazyivan
crazyivan

“Something odd is going on with our money supply.” – the Clam.

Against my better judgement I would personally endorse Stephanie if she were to be nominated for Fed chairman.

crazyivan
crazyivan

Well I’m glad to hear that Steph, sweetie.

Maybe you should take a little break from the stress and come out to MT and help me get my crops in.

https://encrypted-tbn3.gstatic.com/images?q=tbn:ANd9GcTHruPjm0TWoCsYDd5y8IETl1L8qNupz1LKSNj6_yb5cNUu4gJv0A

Sorry, I couldn’t find any pictures that made me look more manly.

TPC
TPC

“Second, I believe that it is likely that CEOs/boards believe that economic circumstances are such that they fear any investment they make has a strong likelihood of disappearing entirely. So the deem it preferable to see their cash devalued by inflation rather than disappear entirely when the economy totally craters.

Third, I believe that there is an expectation that the economy will crater, and that the belief is that hard asset prices will plunge even while consumer inflation remains high. Plunging asset values will offer once in a lifetime buying opportunities for cashed up corps.”

I think its this even moreso than the tax rate. Everybody “in the know” is just waiting for the balloon to pop, and then all of us with our money intact will be scrambling to try and grab everything the suckers are trying to offload for pennies on the dollar.

AWD

“buying risk-free securities that can be instantly converted to cash”

That’s hilarious. Does anyone still believe in “risk free securities?”, if you do, you’re a sucker. Obama started the MyRA to get suckers to buy treasuries, which become more worthless by the day. How risk free are they when the government can no longer afford to even pay interest, let alone principle?

Before long, the government will have to FORCE people to buy treasuries, once our creditors (China, Japan, Russia, EU) stop taking dollars for goods. The only way our government can survive and pay $1 trillion a year for welfare is to peddle debt, IOU’s, aka “treasuries”. Or, better yet, just confiscate and/or nationalize this corporate pile of cash. Won’t be long now.

TPC
TPC

“Before long, the government will have to FORCE people to buy treasuries”

Its a penalty, not a tax.

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