Is the Mountain of Corporate Cash an Illusion? (Part 1)

With the global economy sputtering and employment growth still stagnating, the supposedly high cash levels accumulating on U.S. corporate balance sheets are drawing heightened attention — and plenty of criticism. Politicians would prefer that U.S. corporations deploy their cash to help thin the ranks of the unemployed. Investors, too, are uneasy: Many have accused the business community of lacking “animal spirits,” and have demanded that corporations either reinvest their cash in projects that earn a higher return, buy back their shares, or return the capital in the form of dividends.

The usual discussion of the corporate cash mountain compares growth on a year-over-year basis. According to the Federal Reserve’s Flow of Funds Guide published in mid-September, at the end of the second quarter of 2011, U.S. nonfinancial corporations held liquid assets of $2,047.1 billion, up 24.37% over the prior year. At a time of negative real interest rates, this rate of cash accumulation certainly does seem alarming.

But is it really? The answer, it turns out, is probably not. Read more.