Idle Cash - No Such Thing?

Hi All!

First, let me apologize for my prolonged absence the last few months. It's been an interesting year, and a lot has changed. Some family issues caused me to miss several months of sharing ideas and insights into investing with you. Afterwards, I was lucky enough to get an internship as an equity analyst at American Century Investments. The experience was awesome, but to avoid any risk of disclosure conflicts, I d

ecided to keep it quiet on the InvestingDecoded front. But I'm back! And I wanted to share with you an interesting article I read:

One of the big phenomenons we've seen lately is the build up of cash on the balance sheet of corporations and even investors. A lot of pundits have been saying that this cash is sitting 'idle' and isn't going to work in the economy. John Hussman's article (here) has an interesting take on 'idle' cash saying that there really is not such thing. However, I have a different take on this:

Hussman’s article essentially makes the point that using the cash level on company and individual investor balance sheets as a leading indicator for future stock demand is incorrect. He further states that cash on those very balance sheets should never be considered ‘idle’. Although I agree with him on the first point, I disagree with the second.

As Hussman correctly points out, companies and banking institutions will invest any ‘idle’ cash in highly liquid instruments, primarily consisting of T-Bills and corporate bonds. Although in a strict sense, this would then not make the cash idle, it does have a different impact on the economy. By investing in liquid securities, you are by definition investing in lower yielding instruments and have lower expected return. Therefore, the follow-on impact of that investment will result in more conservative investments. In contrast, by investing in capex, the company is making a direct investment on which it expects a greater return (i.e. at least its cost of capital). Furthermore, as the investment is in capex, it will be passed down the line to other investments as COGS and capex for suppliers/contractors and will result in a higher velocity for the money. Consequently, the economic impact of cash on balance sheets vs. actual investment is vastly different.

Another point worth considering is that much of the ‘idle’ cash is spent on government securities. A majority of government spending is on entitlement spending and, similar to the previous point, it is likely not the most efficient allocation of capital due to these legacy obligations (is Medicare the best place to be spending money right now vs. areas where companies want to spend money?). This further reinforces the point that the economic impact will likely be higher if it is spent on actual goods/services instead of sitting on balance sheets.

Overall, I think Mr. Hussman makes some excellent points. However, all cash isn't created equal, and the way the cash is used has a material impact on its impact on the economy.

What are your thoughts?

Questions/Comments/Feedback?

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The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.