Paging Hyman Minsky
By Arnold Kling
despite the rise in US corporate cash flow, non-financial corporate balance sheets have continued to deteriorate. At the end of the first quarter of 2010 their domestic debt was at record high levels whether measured gross (61.4% of net worth) or net of cash and other interest bearings assets (46.8% of net worth). The factors contributing to this combination of a high level of corporate savings and deteriorating balance sheets are (i) the extraordinary proportion of financial profits to total profits, and (ii) the persistence of a high level of corporate equity buy-backs.
The question itself seems to want to set off the beeper of the late Hyman Minsky. Minsky’s view was that in normal times, firms borrow money to finance investment. In boom times, they borrow money to finance Ponzi schemes. When the Ponzi schemes crash, they rely on internal finance. As I understand the Minsky cycle, for firms to save rather than spend is exactly what one would expect right now, during the “hedge finance” phase.
In fact, Smithers’ comments lead me to worry that firms in the nonfinancial sector are not saving enough. During the housing bubble, we built up a distortion in that the financial sector became disproportionately large and profitable. The bailouts and the stimulus have kept the financial sector strong. As a result, we now have the distortion without the housing construction. Sort of the worst of all possible worlds.
[UPDATE: Fareed Zakaria writes,
The Federal Reserve recently reported that America’s 500 largest nonfinancial companies have accumulated an astonishing $1.8 trillion of cash on their balance sheets. By any calculation (for example, as a percentage of assets), this is higher than it has been in almost half a century.
If I read Smithers, U.S. nonfinancial corporations are hurting. If I read Zakaria, their pockets are bulging. One possibility is that the top 500 nonfinancial firms have bulging pockets, and the rest of the sector is hurting. Otherwise, Smithers and Zakaria are looking at different balance sheet measures, and I have no idea which one is a better indicator.]