Global saving glut
A global saving glut is a situation in which desired saving exceeds desired investment. By 2005 Ben Bernanke, chairman of the Federal Reserve, the central bank of the United States, expressed concern about the "significant increase in the global supply of saving" and its implications for monetary policies, particularly in the United States. Although Bernanke's analyses focused on events in 2003 to 2007 that led to the 2008 financial crisis, regarding GSG countries and the United States, excessive saving by the non-financial corporate sector is an ongoing phenomenon, affecting many countries. Bernanke's global saving glut hypothesis argued that increased capital inflows to the United States from GSG countries were an important reason that U.S. longer-term interest rates from 2003 to 2007 were lower than expected.
A 2007 Organisation for Economic Co-operation and Development report noted that the "excess of gross saving over fixed investment in the "aggregate OECD corporate sector" had been unusually large since 2002. In a 2006 International Monetary Fund report, it was observed that, "since the bursting of the equity market bubble in the early 2000s, companies in many industrial countries have moved from their traditional position of borrowing funds to finance their capital expenditures to running financial surpluses that they are now lending to other sectors of the economy". David Wessell in a Wall Street Journal article observed that, "ompanies, which normally borrow other folks’ savings in order to invest, have turned thrifty. Even companies enjoying strong profits and cash flow are building cash hoards, reducing debt and buying back their own shares—instead of making investment bets." Although the hypothesis of excess cash holdings or cash hoarding has been used by the OECD, the International Monetary Fund and the media, the concept itself has been disputed and criticized as conceptually flawed in articles and reports published by the Hoover Institute, the Max-Planck Institute and the CATO Institute among others. Ben Bernanke used the phrase "global savings glut" in 2005 linking it to the U.S. current account deficit.
In their July 2012 report Standard & Poor's described the "fragile equilibrium that currently exists in the global corporate credit landscape". U.S. NFCS firms continued to hoard a "record amount of cash" with large profitable investment-grade companies and technology and health care industries, holding most of the wealth.
By January 2013, NFCS firms in Europe had over 1 trillion euros of cash on their balance sheets, a record high in nominal terms.
History
Saving gluts are not a new phenomenon. Economists like Karl Marx, J. A. Hobson and John Maynard Keynes considered the effect of an imbalance between savings and investment on the economy, which for them was caused by an overtly unequal distribution of income and wealth Their underlying thesis is that a principal cause of depression is formed by the inability of capitalists to find sufficient investment opportunities to offset the increasing levels of saving generated by economic growth. The underlying reason is that as money is saved, it is extracted from the economic system or flow, which reduces consumption over time when these funds are not invested again. This in turn reduces production, which further reduces income, which further reduces consumption and leads to a depression, which will be resolved when a new equilibrium is found.Plummeting interest rates are a consequence of such a saving glut: as the amount of savings increase with decreasing opportunities for investment, interest rates decrease as the supply of savings outstrips its demand.
The authors on saving gluts however differed in their possible solutions. Marx considered it one of the inherent contradictions of capitalism and therefore saw no long-term solution within the system itself. Hobson prescribed income equalization to reduce savings and re-incentivize the economy.
Keynes proposed that governments could borrow savings when they exceeded investment. The borrowed funds could then be spent on socially useful projects. This would reduce savings, stimulate the economy and offer new opportunities for investment, while not adding to the capital stock. This way, the economy would be revitalized by using overt surpluses for the common good, creating the conditions for renewed economy activity.
When the equity market bubble burst in the early 2000s, companies in many industrial countries reduced borrowing funds to finance their capital expenditures. They began running financial surpluses that they lent to other sectors of the economy. In 2003–2004 the non-financial corporate sector in member nations of the Group of Seven held $US 1.3 trillion of corporate excess saving. By 2011 Statistics Canada reported that Canadian business were "sitting on more than $583 billion in Canadian currency and deposits, and more than $276 billion in foreign currency".
During and after the Great Recession of the late 2000s levels of economic and policy uncertainty rose dramatically contributing to the depth of the recession and the weakness of the following recovery with many corporations globally avoiding investments and increasing their cash holdings, in what has been called "liquidity hoarding", "cash hoarding" or "dead cash".
Cash kings
In March 2013 Moody's Investors Service published their report entitled Cash Pile Grows 10% to $1.45 Trillion; Overseas Holdings Continue to Expand in their Global Credit Research series, in which they examined companies they rate in the US non-financial corporate sector. According to their report, by the end of 2012 the US NFCS held "$1.45 trillion in cash," 10% more than in 2001. At the end of 2011, US NFCS held $1.32 trillion in cash which was already a record level. "Of the $1.32 trillion for all the rated companies, Moody's estimates that $840 billion, or 58% of the total cash, is held overseas."By the end of 2012 Apple, Microsoft, Google, Pfizer, and Cisco, "cash kings", as Moody's called them, held $347 billion at the end of 2012 compared to $278 billion in 2011.
At the end of 2012 Ford Motor Company's cash balance was $22.9 billion and was listed as ten on the list of U.S. non-financial corporation sector's top ten cash kings by Moody's Investors Service in their March 2013 annual report on Global Credit Research.
Causes
In his article in April 2013 Federal Reserve Bank Economist, Kevin Kliesen investigated some of the causes of the "recent upsurge in hoarding of cash by firms" or "increased accumulation of cash on corporate balance sheets" in the United States. He suggested a number of valid reasons including "increased levels of economic uncertainty", "increased competition, especially in the information technology sector" and "financing of research and development". Kliesen also argued that another reason for cash hoarding in the U.S. is the "relatively high U.S. corporate tax rate on income generated from foreign operations and subsidiaries".In an article published in The Economist in 2005, it was argued that the consumer boom was built on the unreliable foundation of rising house prices and that corporations were waiting for housing prices to level off or decline before they are willing to invest rather than save.
Opportunistic borrowing
Financial liabilities have increased at U.S. NFCS firms, suggesting they may be taking advantage of low interests rates, and saving this cash as unused financial assets for future use.Pension deficit
In 2005 Bernanke identified a number of possible causes for the global saving glut that began in 2001, including pension funding to make provision for an impending increase in the number of retirees relative to the number of workers. "Dearth of domestic investment opportunities", due to slowly growing or declining work forces, and high capital-labor ratios, which leads to low returns on domestic investment. As a result, the mature industrial economies seek to run current account surpluses and thus to lend abroad.RBC Global Asset Management's Chief Economist, Eric Lascelles, also argued that NFCS firms were building financial assets as a precautionary measure, claiming that in 2011 "private U.S. defined-benefit pension plans were underfunded by $USD 909 billion", whereas they "were roughly balanced in 2007".