Cash hording helps balance sheets but hurts recovery

After the destruction of balance sheets and a huge short-term funding liquidity problem it is not surprising to see corporate America go conservative. Add on top of this there is the issue of regulatory uncertainty and there is little reason to spend money on new plant and equipment.

Look at the cash flow minus capital spending of non-financial corporations and you see a strong growing positive number. Corporations are in good shape with their balance sheets as we move into the last quarter and 2010. The borrowing that has been done by investment grade companies has be to build cash. The high yielders have been trying to clean-up their balance sheets.

Surprisingly, new research suggests that US companies have actually bee holding higher cash balances than many other international companies. The higher volatility from just-in-time inventory management, higher risks and volatility have all lead to holding more cash. This crisis is a continuation of this process of cash hoarding.

So this is good for the economy, right? They can weather the storm, but it is not clear where the voyage will take them. There is still too much uncertainty about regulatory and labor costs to make strong investments.