Cash Hoarding And The Recession

A lot of people have recently been quoting the factoid that Apple now has more cash on hand than does the US Treasury. That’s funny, though not technically relevant since the Treasury unlike Apple apparently has the legal authority to mint platinum coins of arbitrarily large value. But this does raise a question in the eyes of AJ who writes “So, Apple’s sitting on an absolutely insane amount of money, and they’re liely not the only corporation doing so. Does that help suppress demand in this economy? That’s a lot of money that’s not buying things, after all…”

I think the best way of looking at it is that you’re seeing more a symptom than a cause. The way the economy works is that people with business ideas aren’t the same as the people with money. If people with money just kept it in shoeboxes, then people with ideas would need to go around knocking on doors and asking rich people for some money which would be very time consuming. So the point of a banking system is to hire the money of the savers and lend it out to the people with ideas. When we hear that Apple has a lot of “cash” that doesn’t mean Steve Jobs’ office is full of hundred dollar bills. The money in your savings account is available to the bank to lend out. Big firms don’t have bank accounts just like yours, but their “cash” is similarly, actually a kind of highly liquid short-term investment that increases the amount of capital to borrowers.

In principle, there’s nothing wrong with that. The issue is that there’s very little demand to hire money. If we were looking at an abnormally low level of business investment, we might conclude that the issue is that Kenyan socialism is making firms leery of expansion. But the main story is actually that nobody wants to borrow money to build houses:

The solution would seem to me to be that the government should hire the money to pay people to fix century-old water mains and otherwise engage in improving the public infrastructure. That would increase incomes to the point where private housing demand returns. Then as private demand to hire money for homebuilding purposes rises, interest rates would go up, and we’d start to worry that the cost of hiring money is “crowding out” useful private sector business ideas. At that point we want to drastically curtail government borrowing to ensure the availability of funds to private firms.