This time last year, two economists at the Federal Reserve Bank of St Louis, part of the US central bank, estimated the total cash held by companies listed on the US stock market in 2011 at about $5 trillion. That’s an astonishing 30 per cent of GDP. Now John Plender, a doyen of the Financial Times, has castigated Apple, Google and Facebook for being ‘latter-day Scrooges’. What’s going on? Why do big US firms salt their dollars away, rather than spend them on innovation?
To hoard during an investment slump shows a perverse and striking loss of nerve. America, the land of opportunity, is now a place where the willingness to spend cash on exploiting opportunities is dwindling fast. The St Louis economists do concede that the dash for cash started in the early 1990s, that it’s largely to do with ‘structural factors’, and that it’s likely to have emerged independently of the financial crisis. Yet neither the St Louis Fed nor the FT really want to admit that America’s investment strike is deep-seated.
For the St Louis Fed, the growth of IT firms has led to what it calls ‘the rising importance’ of research and development (R&D) in the US economy; and that, plus increasing competition, ‘seem to have contributed to the rise of cash’. Why? ‘Since R&D is an activity intrinsically connected with uncertainty, the association of R&D and cash holdings is a natural one.’
It’s hard to tell, but perhaps the St Louis authorities meant that R&D-intensive sectors such as IT and pharmaceuticals like cash because the commercial success of their efforts in R&D is uncertain. Here, though they earn little or no interest at banks in the present, cash hoards would be a cushion against failed innovations in the future.
Such a view is implausible and complacent. Cash hoards in both IT and pharma are typically as big as or much bigger than complete annual research budgets. After ‘wasting’ billions on a failed R&D project, funding a new one out of cash rather than as part of normal operations would be both odd, and no big deal. Apple, for example, has $147 billion in cash, nearly double its liabilities; Pfizer has $33.7 billion; Merck, $18.2 billion.