Frugality brings fortune


An Economist article published several weeks ago warns against firms ‘hoarding’ too much cash. It claims firms will be stuck in recessionary conditions until they start investing cash. Such advice should be ignored. While this saving will not produce overnight prosperity, it will provide the foundation for more stable growth in the right direction.

Analysts and government officials frequently forget the childhood lesson of walking in another’s shoes. They cannot understand why monetary policy and stimulus is like pushing on a string. In reality, firms in each of the countries the article mentions are acting perfectly rationally. Profit motivated firms are purely in existence to attempt growth. Companies’ lives teeter on capitalizing, advertising, selling etc. So, if they see risk in investing or spending cash now, why should they? Firms see liquidity risks and market volatility risks.

These firms will not hoard indefinitely. The velocity of money has never been zero, nor will it ever be. Cash is not stuffed into a black hole mattress. Companies will no doubt begin spending and investing when perceived risk has decreased. In fact, the article mentions a German company who plans on lending surplus cash balances.

What happened to the extreme fear of giant corporations investing irresponsibly? Does it apply only to banks and investment firms? If a large corporation invests and spends poorly, employees, stockholders and consumers suffer. Let firms save and lend as they see profitable. If they fail, others won’t make the same mistake.