The Wall Street Journal’s Anna Hirtenstein reported last week that U.S. companies “are sitting on a record amount of cash.” According to the Journal reporter, the number is $6.84 trillion.
To Keynesians, such a number is a bit unsettling. Keynesians believe unspent wealth signals a lack of spending, which is seemingly why they’re so bent on governments taxing away wealth. Figure that politicians exist to spend. Keynesians worship at the altar of consumption. Their economic theorizing is confused, while their alarmism is overdone.
Savings or “stockpiles” of cash in no way subtract from demand in the first place. Corporations don’t hide their unspent cash in a vault; rather they bank it in return for a rate of interest. Banks don’t stockpile money either. To do so would be for them to rapidly rush toward insolvency. Banks pay for deposits precisely because they can lend the funds taken in at a higher interest rate than the one paid to the depositor.
What’s encouraging about unspent wealth is that while some of it is shifted toward those willing to pay a rate of interest in order to attain goods and services now (we borrow money for what it can be exchanged for), for others the unspent wealth serves as capital. The frugal, whether individuals or corporations, are economic growth personified. When they don’t spend all of their money, the latter exists as capital for entrepreneurs and businesses seeking funds necessary to bring life to their commercial visions. There’s quite simply no innovation, and no growth or its attendant job creation without saving first. The Keynesians have it backwards.
At the same time, they’re not the only ones a bit confused about money; “idle” money in particular. You see, there are those who believe that in lending out money, banks are playing the role of counterfeiters. Such a belief mistakes what money is. The mistaken believe that banks, by lending out the money they “rent” from savers, “multiply” money in counterfeit fashion.
In their rendering, a bank takes in $1 million from corporation A, only for the bank to lend out $900,000 to corporation B which subsequently banks it, only for another bank to direct 90% of corporation B’s funds to corporation C. Soon enough $1 million is a little over $2.7 million, at which point nefarious banks have multiplied away the value of the dollar. Except that such reasoning doesn’t stand up to basic scrutiny. Which calls for a digression; albeit a known one for those who read this column with any kind of regularity.
The simple truth is that no one buys and sells with money, or lends or borrows with it. Money flows represent goods and services flows. Money is just the referee. It’s an agreement about value that makes exchange among actual producers possible. We all work for money, but we’re really working for what money can be exchanged for. When there’s broad agreement (or trust) about money’s exchangeable value, actual exchange is abundant. In other words, the successful Microsoft salesman is able to use the cash proceeds from software sales in order to buy a house on Mercer Island precisely because the owner of the house on Mercer Island is confident that those dollars will purchase commensurate market goods.
Same with saving and lending. No one long on – say – $1 million in cash would deposit it at a bank if the deposit of $1M could soon morph into millions and tens of millions of cruelly devalued dollars sloshing around the U.S. and world. If money were truly “multiplied” as some errantly assume, there would be no saving to speak of. Which means there’s no multiplication in the first place.
If anyone doubts this, they need only conduct their own experiment along the lines of corporations A, B, and C, only they could do it with friends at a kitchen or restaurant table. Better yet, conduct the experiment sans reserve requirements needlessly foisted on banks. Friend A becomes a “bank” only to unsheathe $100. Friend A lends to friend B the $100, only for friend B to lend it to friend C. Voila! $300 created out of thin air according to the multiplier theorists. Actually, there would still only be $100. When we lend money we forfeit use of it. The multiplier theory implies that we can lend $100 while still having $100. No, such a view isn’t serious. No doubt we could potentially borrow $100 from someone else by showing them our $100 loan, but then that individual would have $100 fewer dollars. Multiplication is myth.
Yet some wise people think the savings that terrify Keynesians for representing unspent wealth are in truth terrifying because they signal wealth inflated away. Banks should “warehouse” money rather than lend it, seems to be the mantra of the “money multiplier” theorists. Except that if banks were warehouses, savers would pay them a rate of interest.
More specifically, markets work. Markets are informed. The money multiplier theory quite literally suggests that as opposed to boosting capital formation in return for a rate of interest, savers hand banks the means to quite literally inflate away the dollar’s value. Along with their own savings.
All of which brings us back to corporations. Supposedly they have $6.84 trillion in cash right now, which means they’re lending out trillions right now. If the multiplier theory had even a scintilla of truth to it, corporate cash stockpiles would be a signal of the world’s most valuable, best-managed companies literally sitting back and watching their precious wealth wiped away by “counterfeit” bankers.
No, not really. If money were in a constant state of evisceration due to savings, no one would use it in the first place. And there would certainly be no savings. If anyone really needs truth that the “money multiplier” theory brings new meaning to conspiracy-minded bunk, just direct them to corporate cash stockpiles measured in trillions.