Friday, June 11, 2010

Companies are Still Risk Averse

The Wall Street Journal has an article today about a report cash holdings of nonfinancial firms. Cash holding are up 26% from a year earlier, and the increase is the greatest ever in records that go back to 1952. Evidently, firms are very cautious and risk averse still. I wonder if we have a kind of employers' strike, as some have described the latter part of the Great Depression. There was so much concern by business leaders then over the activism of the government and uncertainty about future policy that they were fearful to increase investment spending and hiring. The current situation is reminiscent of that, but we still have too small a time period to reach such a strong conclusion.

3 comments:

  1. The WaPO editorial page hit on this same theme on Monday:

    "But as analysts ponder the mystery of weak private-sector hiring despite signs of economic growth, it's worth asking what role is played by government-induced uncertainty. With the federal government promoting major changes in health care, financial regulation and energy law, it wouldn't be surprising if some companies are more inclined to wait and see than they might otherwise be. And that's especially true when they look at looming American indebtedness and the effect that could have on long-term interest rates."
    http://bit.ly/ayDoZ2

    Also, Bob Higgs has an excellent article about "Regime Uncertainty" during the Great Depression that I highly recommend.
    http://bit.ly/aSOvTt

    Table 1 on Page 11 of the Higgs article highlights some of the laws Congress passed to extenuate the uncertainty. Congress appears to be repeating itself during this recession.

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  2. Thanks for the comments and sources. I have read some of Higgs' works before.

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  3. Ahhhh . . . the classic Keynesian 'liquidity trap."

    But the $787bn stimulus doesn't appear to be doing much either. Are we going to see bigger, badder stimuli down the road??

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