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Hoarding

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Just thinking out loud here about the cash balances data that Jason G noted. I rarely hear any analysis about why investors might be increasing their cash balances. What causes investors to do such a thing? What is the purpose? After all, aren't those questions as least as important as understanding that cash balances are there in the first place?

It is interesting that almost all of the standard economic histories of the great depression here in the US suggest that one of the causal factors was that banks at the time were 'hoarding' cash. They were not lending it out to businesses or individuals who would use that capital to start business, create jobs, and to buy things. They just sat on it. They were simply too risk averse to lend it out.

That it is bullish that current cash balances and available cash (margin plus available cash) are at record levels presumes something very important: that the cash in fact will be put to work buying stocks.

This is why it is important to understand why people are increasing their cash holdings. Is it because there investors simply cannot find any good investments at present? Are they overly pessimistic about the state of the economy? Are they temporarily reducing risk (by increasing time preferences and thus increasing cash holdings) because of some geopolitical factor? These would be, as Jason points out, likely bullish.

Or is something more secular and thus long term at work? An increase in cash balances could well be indicative of a strong deflationary trend among investors - deflationary in this sense being defined as an increase in time preferences and thus a decrease in risk appetite. Once hoarded, that cash may not make it back into the markets very soon at all. After all, the more the Federal Reserve and both the Wilson and Roosevelt administrations tried to stop 'hoarding' the more banks, businessmen, and individuals did it (which ultimately led to the confiscation of all private gold holdings, but that's a tale of evil for another article).

The answer to the question of "why" investors are increasing their cash holdings isn't exactly easy to answer. A look at cash balances (even at banks - it need not be only brokerage accounts) through various inflationary and deflationary periods in major economies would be a good place to start looking for answers: Japan from 1990 to present; the US from 1925-1940; some Latin American countries variously over the last 25 years, etc.

My larger point is this: we need to understand the reasons people are hoarding cash; it's just as important to knowing that cash is available to buy stocks. After all, the Wilson and Roosevelt administrations were downright panicked by an increase in cash holdings in 1930-1933. Panicked enough to unconstitutionally steal every man, woman, and child's gold in America.

How do we know we shouldn't be just as worried by an increase in cash balances now?

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