Why are US firms holding so much cash?

A question for the last few years has been: why are U.S. firms holding so much cash?  Cash holdings as a percent of net assets has increased by 22% over the last few years (around a trillion dollars).  Note: this is a question about why firms are holding so much wealth in liquid form!  Most explanations hover around the impact of the financial crisis, the Great Recession, and policy uncertainty.  While never satisfied (anything that smacks too heartily of politics is wrong more often than not), Corrections lacked good micro evidence.

Of course, Compustat has a large sample of firms in its dataset with detailed information on financial holdings.  Examining it, we find  aggregate cash holdings of firms has been dramatically increasing since around 1996 (increasing to 500% of original value).  From the St. Louis Fed's Juan Sanchez and Emircan Yurdagul, aggregate cash and equivalents of U.S. Firms (from Compustat) (click to enlarge):

Or, in percentage terms of net assets (the real question, as it is more reasonable to stay constant over time) (click to enlarge):

The Trends of Federal Receipts and Outlays

Below, Corrections depicts log Federal outlays and log Federal receipts under Reagan, Bush-I, Clinton, Bush-II, and Obama up until August 2013.  We also display the Reagan-Bush I-Clinton trend extrapolated out through Bush and Obama's terms.  We attribute the split January to the outgoing President, as he exits around the end of the third week of that month.

Log outlays tell a clear story:  outlays under Reagan, Bush I, Clinton, and Bush II continued on trend.  They saw a dramatic jump, and then a fairly stark arrest under most of Obama's term (click to enlarge).

Log receipts tell a different story:  while outlays have gone according to trend, receipts were halted under Bush, and again under Obama (click to enlarge).  For both, this was a result in part of tax cuts (or tax cut extensions) and bad economies.

Finally, we depict the two together (click to enlarge):  the short time the blue line was above the red line represents the Clinton surpluses, and the near-zero deficit of the Bush term before the financial crisis ended hopes of a balanced budget.

Fannie Mae and Freddie Mac: Borrowing and Payments to Treasury

In September 2008 Fannie Mae and Freddie Mac were placed under the Conservatorship of the Federal Housing Finance Agency.  At the time, they owned around $3.4 trillion in mortgage backed securities and $1.6 trillion in debt.  In return for $100 billion (later $200 billion) in capital investments guarantees, the U.S. Treasury received $1 billion in senior preferred stock with a 10% coupon (later changed to sweep all of Mae and Mac's profits).

How bad a deal was this for U.S. taxpayers?  We know that the Maiden Lane I and II transactions (the bailout of AIG) ended up making money for the Treasury and Federal Reserve Bank (while the Treasury is still $24.2 billion in the hole, it owns 53% of the stock of a company with a market cap of $71 billion).  How much did the bailouts of Fannie and Freddie cost U.S. taxpayers?

Below, Corrections depicts the cumulative draws and dividend payments that Fannie has engaged in with the Treasury (click to enlarge).  Often, the companies were drawing on the Treasury's capital in order to pay the required 10% dividend to Treasury (hence, dividends are being paid to Treasury at the same time draws are being made).

We can alternatively look at the simple difference between net loans and net payments (click to enlarge):

Both Fannie and Freddie look to be on track to pay back the Treasury for capital infusions over the next few years.  However, because these payments are simply payments to the government's preferred stock, and not considered paying back loans (the government offered a capital line, not loans) the government is likely to make a profit on this deal, even if we wind down Fannie and Freddie over the next few years, as both the House, Senate, and White House desire (though in different ways).  

Unemployment Rate by Gender over Time

Below, Corrections displays the unemployment rate by gender over time (click to enlarge).

U.S. Bank Failures over Time

Below, Corrections graphs out the number of bank failures by quarter from 1934:Q2 to the 2 bank failures occurring in 2013:Q1 so far (click to enlarge).

Consumer Debt over Time

This recession was a period of U.S. consumers paying off in debt in dramatic fashion.  The first figure is consumer debt as a fraction of GDP by type over time:  mortgage debt has declined precipitously, and the much-talked-about increase in student debt is a minuscule part of U.S. debt (click to enlarge).

Corrections also displays total consumer credit balance by delinquency status:  while we've been paying off debt, a large fraction of debt remains delinquent (click to enlarge).

Flow of Funds: Net Borrowing as a Percent of U.S. GDP at Annual Rates by Sector

Corrections displays the Fed Flow of Funds data.  The Flow of Funds data breaks the economy, for example, into seven sectors:  the household sector, nonfinancial corporate businesses, nonfinancial noncorporate businesses, state and local governments, federal government, rest of world, and financial sector.  Net lending in the world must add up to zero:  there are two sides to every loan.  The flow of funds breaks up the U.S. and the rest of the world, and then breaks up the U.S.  Nevertheless, the sum must still be zero.

Below, Corrections displays the flow of funds for each sector over time (click to enlarge).

The same graph zoomed into the recent period is depicted graphically below (click to enlarge).  Note that while the Federal government is borrowing much more than it used to, as a country we're receiving less than we used to from the rest of the world:  the Federal deficit is being made up by the financial sector. 

What is the financial sector?  The lending portion is made up of the Monetary authority, chartered banks, foreign banking offices in the U.S., credit unions, insurance companies, private and public pension funds, money market mutual funds, mutual funds, closed-end funds, exchange-traded funds, government sponsored enterprises, agency and GSE-backed mortgage pools, ABS issuers, finance companies, real estate investment trusts, brokers and dealers, holding companies, and funding corporations.  The borrowing portion is similar.  We organize these sources into four main sources:  1) private/stock market, such as mutual funds, exchange traded funds, and private pensions 2) government sans monetary authority, such as GSE-backed mortgage pools, government retirement funds 3)  foreign banking offices in the U.S. 4)  the monetary authority and funding companies (AIG and Bear Stearns, for instance).  We graph these four graphically below (click to enlarge):  they add up to the light blue line in the above graph.

From the second graph, we note that the Federal government is borrowing more and that this is financed by the financial sector.  We further note that within the financial sector, it is being financed primarily by domestic funds and the stock market, rather than the monetary authority.  

Bond Yields

Below, Corrections plots out bond yields in the recent period: corporate AAA, BBB, and CCC yields according to Merrill Lynch, and Treasury Constant-Maturity yields.  Note that during the housing crisis, corporate bond yields went up, while treasury bond yields went down:  

Balance Sheet of U.S. Households and Nonprofit Organizations 1949-2011

Below, Corrections displays the Balance Sheet of Households and Nonprofit Institutions in the United States from 1949-2011, in real 2011 U.S. dollars (click to enlarge).

Business Employment Dynamics: 1992:Q3-2011:Q2

Below, Corrections shows Business Employment Dynamics data from 1992:Q3-2011:Q2.  We index to 1992:Q3=1, from data originally in levels.

• Gross job gains are the total people hired in a quarter (not subtracting losses).  U.S. generally has around 7.6 million total gains in a given quarter.  
• Expansions are businesses that reported more jobs than last quarter.  U.S. generally has around 6.1 million firm expansions in a given quarter.
• Openings are businesses that did not exist in the previous quarter.  U.S. generally has around 1.6 million firm openings in a given quarter.
• Gross job losses are the total separations in a quarter (not adding gains).  U.S. generally has around 7.4 million total losses in a given quarter.
• Contractions are businesses that reported fewer jobs than last quarter.  U.S. generally has around 6.0 million firm contractions in a given quarter.
• Closings are businesses that reported last quarter but are no longer active.  U.S. generally has around 1.5 million closings in a given quarter.

We generally think of having both gross job gains and gross job losses high as creative destruction:  while not much is moving, there's a lot of churn in the economy, generally very good.  We generally think of having both gross job gains and gross job losses low as stagnation or sclerosis:  not much is flowing in the economy.

The 1990's and the Great Recession both show prominently in the figure of BED data, depicted graphically below (click to enlarge).

AAA vs. BAA Bond Spreads

Below, Corrections takes the difference between daily AAA and BAA rated bonds (Moody's, from the FRED database) and displays recessions (click to enlarge).

When the data from Operation Twist and the subsequent days become available, we'll put those graphs up too.

Employment to Population Ratio

Below, Corrections offers the employment to population ratio (click to enlarge).  Note the sharp effects of recessions and our current stagnated ratio.

No Bubble #2

An old paper from Greg Mankiw and David Weil, "The Baby Boom, The Baby Bust, and the Housing Market" (1989) offers one possible reason for the transitions we've seen in housing prices: an anticipated baby boom.  The paper offers nice depictions in dynamics that Corrections wishes were present in more papers.  If the boom is transitory, we have supply and demand temporarily moving and falling back down along the same supply curve (click to enlarge)

Or, offers a graph that might be informative about our current housing issues: what would happen to housing prices in a forward-looking and a naïve world under a baby boom (click to enlarge):

Look familiar? (In shape, not in magnitude!)  Almost like a partially-anticipated, rational boom that dissipated when the state of the world turned out to be different.

No Bubble

Was there a housing bubble? For people who think there was, aren't we still in it? When will it pop? Housing has fallen less than half of its "bubble" high (click to enlarge).

June 2011 JOLTS Release: April 2011's Beveridge Curve

Using the recent unemployment rate from the CPS and yesterday's JOLTS release, Corrections offers an updated Beveridge curve (click to enlarge).  Note the adjusted axes, so that recent trends can be seen more easily.

Unemployment Rates by Education, and Education Premium

Below, the unemployment rates over time for four education groups (click to enlarge).

We might also be interested in the unemployment "premium" (neglecting selection) that college-educated have over other education groups.  One way to do this is looking at the difference in unemployment rates over time (equivalent to making the purple line above the new "zero."  This is displayed graphically below (click to enlarge).

Interesting to note that selection arguments about the premium get a bit more tricky when we talk about rapid changes in unemployment for large stocks of educated people.  Either way, this recession moved the College premium from less than high school from around 5% lower unemployment rates to around 10% lower unemployment rates.

Weekly Initial Jobless Claims - May 26th Release

Weekly Initial Jobless Claims up until May 21st (click to enlarge).  Note the last five weeks.

Weekly Initial Jobless Claims - May 19th Release

Weekly Initial Jobless Claims up until May 14th (click to enlarge).  Note the last four weeks.

May 2011 JOLTS Release: March 2011's Beveridge Curve

Using the recent unemployment rate from the CPS and yesterday's JOLTS release, Corrections offers an updated Beveridge curve.

Weekly Initial Jobless Claims - May 12th Release

Weekly Initial Jobless Claims up until May 5th (click to enlarge).