Cash on the Sidelines Has Nothing To Do With Uncertainty

One more thing about “uncertainty” is that you often hear that the problem with uncertainty is that it’s because of uncertainty that we have all this corporate cash “on the sidelines” as profitable firms just build up war chests rather than investing.

This is why you need to have models. Even very little, primitive models. Because you can’t model this idea. A firm with profits must choose what to do with the money. There is a convention of referring to corporate funds stored in highly liquid investment vehicles as “cash” but when we say that Apple has $100 billion cash on, we don’t mean that there’s a big room in the basement where Tim Cook goes dividing amid the $100 bills. Whenever you’re making an investment decision, the fact that the future is uncertain is a real problem. But there’s no particular reason to think that “uncertainty” about the future should specifically bias you in favor of low-yield highly liquid investment decisions.

Now, by contrast, something that very much could bias you in favor of low-yield highly liquid investment decisions is certainty that the inflation rate won’t rise above 2 percent. The lower you expect inflation to be and the more confident you are in that forecast, the more comfortable you should be with a low-yield investment strategy.

Another thing that should bias you in favor of a low-yield highly liquid investment decision is skepticism about the economy’s overall growth prospects. If things are going to be generally crappy, then you’re not necessarily missing out on much by opting for liquidity.

That’s why a real strategy for bringing corporate cash off the sidelines doesn’t have anything to do with tax reform (though tax reform might be nice), it has to do with monetary policy. Specifically an NGDP targeting strategy or an “Evans Rule” strategy would work on both of these dimensions. That’s because both the Evans Rule or a reasonable NGDP target amount to a promise that either real growth will be faster-than-expected or else inflation will be faster-than-expected or else both. That doesn’t give you “certainty” about the future, but it gives you a rational basis for shifting assets at the margin out of low-yield high-liquidity strategies and into more aggressive ones. That more aggressive business investment posture should, in turn, produce both more real output and somewhat higher prices thus creating a credible virtuous circle.

Frustratingly, if you talk to the smart analytic economists and the investment banks this is exactly what they’ll tell you we should do. But instead of talking to them, the media prefers to lavish attention on CEOs who just want what all rich guys want—lower taxes and less social-welfare spending.