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U.S. Corporations are sitting on an all-time-record $3.6 trillion in cash

By       Message Mike Whitney       (Page 1 of 2 pages)     Permalink

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Here's something to think about: U.S. corporations are presently sitting on more money than anytime in history, a ginormous $3.6 trillion mountain of cash. That's $670 billion more than the previous peak in 2007 just before the market began its long-slide into oblivion.

Now if you're a market analyst on one of the financial channels, then this is "great news," because -- after all -- big business is in good shape, right?

But what if you work on Capital Hill, and your job is to strengthen the economy by passing laws that balance supply and demand? Well, then things aren't looking so good, are they? Because you've created an economy where all the wealth is controlled by just a few people which means that demand will remain chronically weak because working people don't have the wherewithal to purchase the widgets and other useless gadgetry that businesses sell.

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Do you see the problem? Corporate America's $3.6 trillion behemoth pile is not a sign of success, it's a sign of failure. It's a sign that policymakers and regulators have abdicated their role as "free market" referees and simply thrown in the towel giving the deep-pocket guys everything they want.

So, how are corporations going to bump-up their profits now that consumers are flat on their backs and households are still smarting from the $8 trillion in home equity they lost when the bubble burst?

That's easy; they're going to do what they've been doing for the last three years -- juice the market by buying back shares in their own companies. Get a load of this blurb from Charles Biderman's Trim Tabs:

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"The stock market is up over 11% so far this year. ... There is only one reason the stock market is rising and that is that the Federal Reserve has given away so much free money that the public companies are using their balance-sheet cash to buy back many more shares than they and the public are selling.....

"To repeat, the only source of new money with which to buy stock is coming from companies buying back many more shares then they are selling. However, that could be changing.

"While companies are continuing to buy back shares, which is why we are still bullish, there are some reasons to worry about that trend. First of all insider selling is surging. The rate of insider selling to buying went from a 5 to 1 ratio in January to a 14 to 1 ratio of insider selling to buying in February to 35 to 1 starting the second week of March." ("Third Consecutive False Dawn for Stocks & Economy", Trim Tabs)

Is it just me or does that sound a lot like "gaming the system"?

On Friday, Bloomberg's "Chart Attack" featured JP Morgan economist Tom Lee who covered most of what I'm going over here. Lee predicted that US corporations would continue to use their money "to boost dividends or increase buybacks." He also added this shocker:

"...dividends are up $20 bil or 10 percent this year and I think buybacks are going to really step up this year. And I think that's why the stock market has continued to go up even though retail inflows are negative and hedge funds not buying stocks and pension funds not owning equities. It's because corporates over the last 20 years have accounted for 87 percent of all the inflows into the stock market. If you look at the last 20 years retail inflows into the stock market have been about $1.5 trillion while corporate inflows have been around $6 trillion."

(You can see the whole video here: ("Chart Attack: Following the Corporate Cash Hoard", Bloomberg)

Did you catch that? "87 percent" of the money flowing into the stock market is coming from corporations (which includes banks and financial institutions). Retail investors, like you and me, don't matter at all. Mom and Pop only account for a piddling 13 percent of the inflows.

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Now let's try a thought experiment: Let's say that Barack Obama suddenly realizes how screwed up the economy really is and decides that he wants to change a few things. So, he calls you up and asks if you have any ideas about how to balance supply and demand so he can create a more efficient economy that spreads prosperity to the greatest number of people possible. So, how do you answer that question?

First off, you tell him that resources have to be more equally distributed so that demand stays strong and we're not mired in a semi-permanent state of depression. In order to do that, wages have to keep pace with production, right? In other words, working people have to earn enough to buy the products that businesses produce.

Second, you need to make sure that tax policy reflects your goal of maintaining strong demand. So, obviously, if $3.6 trillion is stuck in corporate bank accounts, congress isn't doing its job, right? That money needs to circulate through the economy so activity stays at a high level, which means that taxes need to go up, up, up, so that more of that money is recycled to where it can do some good (by increasing consumption).

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Mike is a freelance writer living in Washington state.

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