In creating our model we saw that its sustainability was dependent on two factors. Firstly imports should equal exports over the medium term, and secondly that a natural flow of money from consumer to producer and back to consumer needed to exist.
In the case of the UK, currently, neither of those situations exist. We should therefore look at the future with grave concern, as we are on a path to nowhere! I won't say oblivion … but
A brief look at the diagram will show you that the only true new money into our system comes from exports … everything else is created by borrowing. While this diagram has specifically excluded Capital flows from the "rest of the world", I will show in a later post that these will often have other negative impacts.
Once we accept that our money system is a “Ponzi scheme” we all need to be playing our role in keeping the chain intact, limiting the amount of leakage (diarrhoea), as well as limiting the amount of hoarding (constipation). Just as with the human body either of these conditions is debilitating, so are they to the economy!
Our economy has been operating on a trade deficit of around 2% since 2002, the last trade surplus was the year to April 1998. We can no longer look at this as simply a medium term phenomenon and should be taking steps to reverse the trend. I have shown in the previous blog that our deficit in international trade is not the only form of leakage taking place, but perhaps, we can return to that as a topic in a future blog … for today I am looking at hoarding!
Is hoarding good or bad?
We all understand the need to put something aside for a rainy day, or to give us a pension for our later years. Looking at the model we see that the effect of this action is to remove some of the money from the economy.
How can this be?
I did not put it under the mattress
I put it in the bank!
To complete our transactions in our model someone is going to have to borrow, otherwise there is not enough money in the hands of consumers to buy the spear!
When we remove money from what I call the “real economy” (the transactional economy that supplies our every day needs and requirements) we are in fact moving it into what I call the “imaginary economy” (the world of stock exchanges, money markets and the like).
If our economy were vibrant, there would be a continual demand for borrowings by entrepreneurs to finance new business activity, which would be returning that “saved” money into the transactional economy and thus do no damage. If on the other hand the demand for borrowing is from the consumer we have an unsustainable situation arising, vis a vis the build up to 2007.
Our economy / monetary system should be able to handle and absorb a certain percentage of our incomes moving out of the “real economy”, it is only a question of degree, maybe 10% is acceptable while 25% could really do damage.
We can therefore say that there is a level of hoarding which the economy can and must be able sustain, otherwise there would be no possibility of pensions.
Build up of Cash in Corporate sector.
We saw in “misfiring on some cylinders” that the hoard of cash on business balance sheets has grown from 26% of GDP (total value added or output of UK economy) to 47% or £ 749 billion.
We have seen that the theory of our money system relies on money flowing from consumer to business and thence back to consumer as wages, dividends and profit shares. We have also seen above that a portion needs to held back for investment and future growth, to fund our pensions and other aspirations.
We can understand the need of business to maintain a cash reserve to satisfy its transactional and investment needs over the next year or two.
Our real question is … How much?
We now need to ask why corporations are holding so much cash.
My own belief is that at 47% of GDP the amount is grossly excessive.
If business was able to operate quite happily keeping 26% of their value added as cash and the economy was maintaining a reasonable level of growth, then it is difficult to justify increasing their cash holdings to 47%, when that action is going to stall the economy.
What happens to that cash?
By and large it is moved into the “imaginary economy” the stock exchange and money markets, where speculation rules the day.
The main reason for this cash build up is not a need by the company, but to improve the “perception” of the “markets” about the power of the company, To keep some sort of excitement about their share price, the markets are fed by rumour and innuendo where cash build ups act as a supporting mechanism and help to keep a “buzz” about the company and what it's future might be.
Having listed my own company in the 1980's, I am only too aware of the changes that take place when company management becomes obsessed with share price and stock market perception, instead of the real function of running the company efficiently. Rather than being sensitive to the company's market one becomes sensitive to the analysts and their expectations.
A certain amount of cash reserve can be justified on the basis that it puts the company in a position that enables it to take advantage of “opportunities” that present themselves from time to time.
But 50 odd percent?
It is a case of rather severe constipation. So severe that it might yet need require a surgical procedure to remove the blockage!
Funny isn't it that we allow the multi-nationals to drain resources from the country at an alarming rate, while our own corporations are so constipated that they are depriving the economy of its life blood … the return flow of, a fair share of the money from profits, to the consumer!