Fearful, Anti-Social Cash Hoarding
Politics / Credit Crisis 2012 Apr 19, 2012 - 02:25 AM GMTBy: Adrian_Ash
How much longer will companies be allowed to run themselves for cash...?
HOARDING stuff until your home is a health hazard and your family and neighbors hate you isn't only a TV "reality". Perhaps 1 million US citizens are prey to the hoarding compulsion on one estimate, fighting the urge to let everything just keep piling up.
"Hoarding and anxiety," according to one fighting sufferer, "go hand-in-hand. Fear keeps us from letting go of objects we don't need." Overcoming that fear is a tough job, however. "Clean-up usually provokes intense anxiety," says another report, noting that hoarding stems variously from dementia, depression, and obsessive compulsive disorder amongst other deep-seated troubles.
"Anyone helping the hoarder – even a professional cleanup crew – should be gentle, always caring and encourage the person to deep breathe and relax." Which sounds fair enough given the anxieties involved. But what about shouting at the sufferer instead?
"Companies' growing cash piles are irking shareholders and stunting growth," said the Financial Times in late January. "Politicians and policymakers are going to have to ask the question," added David Bowers of Absolute Strategy Research, wagging his finger – "How much longer are we going to allow companies to run themselves for cash?"
Barely a fortnight later, Martin Wolf was at it in the very same pages. "Britain needs to whittle down corporate cash piles," Wolf declared. "If the fiscal deficit is to disappear...there needs to be a mixture of lower profits, higher investment, and significantly smaller current account deficits," he went on, quoting Andrew Smithers of Smithers & Co. "Increases in government investment and private housebuilding would also help," said Wolf, parroting the Anglo-Saxon post-war consensus. This attack on corporate cash hoarders is new, however. Because corporate cash hoarding is so new, it's barely noticeable.
"Highly indebted UK households should not run large deficits again," said Wolf. Or to quote The Times just this week, "Consumers cannot lead recovery. Britain needs business to stop 'stashing the cash'."
Put another way, "Companies must stop hoarding cash and start investing instead," says Will Hutton in The Guardian, quoting this week's same press release from the same think-tank, Ernst & Young's ITEM Club. "David Cameron and George Osborne have still not developed a full-throated industrial policy that would encourage companies to spend money on investment and innovation."
"Business investment has picked up nicely in the US," says ITEM's chief economic advisor, Peter Spencer, apparently ignoring the huge $1.24 trillion hoarded by US corporates by the end of 2011 – more than half of it outside Uncle Sam's clutches according to Moody's, who compiled the data, as emerging-market growth plus onerous US tax treatment drives businesses to avoid remitting profits back home.
Look, if everyone shouts loudly enough, maybe the hoarders will snap out of it? They are trying already, however, if only at gun point. Thanks to 2011's flat S&P performance, US equities continue to pay a higher yield than Treasury bonds, something unseen for half-a-century prior to 2009. Here in the UK, "Total dividends paid by UK companies hit a record £67.8 billion in 2011, a rise of almost 20% on 2010," reckons stock broker Hargreaves Lansdowne. "Encouragingly, dividend growth was seen across all industry sectors."
And it's not like corporate US and Britain didn't do their bit in fighting the war of debt vs. recession starting in the mid-1990s either. Over the 12 years ending spring 2009, for instance, private-sector UK companies outside the financial sector spent 124 months growing their bank debt net-net. Yes, UK households fought harder (141 out of 144 months), but they began to rein in their borrowing sooner and actually saved money right when the canon fodder were called on for a last "big push" in late 2007.
But who cares? "British companies are running a cash surplus of some 6% of GDP, the largest in the world," says Hutton, wagging his finger at people making a profit and daring to keep it. "[They] are refusing to spend that cash on investment or innovation, preferring to hoard it, preserve profit margins or buy back their own shares."
Oh the monsters! Refusing to spend...stashing the cash...hoarding, in short. It must not be allowed. Which is why the financial press began softening up public opinion at the start of the year, when the Financial Times first ran that story about what it called "the $1,700bn problem. Companies in the US are flush with cash and are paying out a smaller proportion of their earnings as dividends than ever before. Much the same can be said for western Europe. Governments and households on both sides of the Atlantic are meanwhile strapped for cash. This cannot persist much longer."
"Businesses run 'for cash', rather than spending in an attempt to boost revenues, do not promote growth," said the FT. The government should do something to stop it!
"The battle front today is against the hoarding of currency. No one will deny that if the vast sums of money hoarded in the country today could be brought into active circulation there would be a great lift to the whole of our economic progress."
So said Herbert Hoover, then US president, as the United States sank towards the depths of its Great Depression in the early 1930s. "We are making war on depression. War against a lack of confidence. Our people must have something tangible to do in the fight. There is no use to go out and say 'Have confidence, courage and faith.' They must have something positive to bite on.
"They can bite on the question of hoarding."
Hoover's war on the hoarders drew opinion and business leaders to enlist in Washington. "It [hoarding] began in April last year in consequential amounts," Hoover told a private White House gathering of newspaper editors and other luminaries in February 1932. "The disturbances in Austria, which finally culminated in the German panic, showed paralleled increases of hoarding in the United States, which rose at one time to about seventy or one hundred million a week...[Then came] the disturbance in Great Britain which finally resulted in the British abandonment of the gold standard.
"Instantly, within 24 hours after the Bank of England ceased paying gold, hoarding jumped in the United States to $250,000 a week."
Then as now, people kept hold of their money – hoarded it at home, under the mattress – because they were fearful of default by the banks. Hoarding created that very event, said Hoover. But still others were fearful of what the government would do to try and prop up the banks, so they hoarded gold bullion too, keeping it at home – out of circulation and safely away from bank credit. This, like "refusing" to spend corporate profits, was deemed bad for the nation. Because back then, unlike today, gold really was money, the base of America's credit, and so such behavior could not be allowed to persist. After Hoover's war on depression, his successor turned on what seemed the cause: "nothing but fear itself". Or rather, the outcome of that fear, as manifest in the private desire to hold physical gold. Roosevelt made gold bullion illegal for everyone but the State to own, nationalizing private gold holdings at $26 per ounce, raising the official price to $35 per ounce.
Roosevelt thereby enforced on the United States the very Dollar devaluation which gold hoarders had forecast. All they had to fear was what they already feared. Such hoarding was hardly irrational.
By Adrian Ash
BullionVault.com
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Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2012
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