Global saving glut

global saving glut (also GSG,[1][2] cash hoarding,[3][4][5][6][7][8] dead cash,[9] dead money,[10] glut of excess intended saving,[11] or shortfall of investment intentions)[11] is a situation in which desired saving[notes 1] exceeds desired investment.[12] By 2005 Ben Bernanke, chairman of the Federal Reserve, the central bank of the United States, expressed concern about the “significant increase in the global supply of saving” and its implications for monetary policies, particularly in the United States.

Although Bernanke’s analyses focused on events in 2003 to 2007 that led to the 2007–2009 financial crisis, regarding GSG countries and the United States, excessive saving by the non-financial corporate sector (NFCS) is an ongoing phenomenon, affecting many countries.[13][14][15][16] Bernanke’s global saving glut (GSG) hypothesis[17][18] argued that increased capital inflows to the United States from GSG countries[notes 2] were an important reason that U.S. longer-term interest rates from 2003 to 2007 were lower than expected.[12]

A 2007 Organisation for Economic Co-operation and Development (OECD) report noted that the “excess of gross saving over fixed investment (i.e. net lending) in the “aggregate OECD corporate sector” had been unusually large since 2002.[13] In a 2006 International Monetary Fund report, it was observed that, “since the bursting of the equity market bubble in the early 2000s, companies in many industrial countries have moved from their traditional position of borrowing funds to finance their capital expenditures to running financial surpluses that they are now lending to other sectors of the economy”.[14] David Wessell in a Wall Street Journal article observed that, “[c]ompanies, which normally borrow other folks’ savings in order to invest, have turned thrifty. Even companies enjoying strong profits and cash flow are building cash hoards, reducing debt and buying back their own shares—instead of making investment bets.”[4] Although the hypothesis of excess cash holdings or cash hoarding has been used by the OECD, the International Monetary Fund and the media (Wall Street JournalForbes, Canadian Broadcasting Corporation), the concept itself has been disputed and criticized as conceptually flawed in articles and reports published by the Hoover Institute, the Max-Planck Institute and the CATO Institute among others.[19][20][21] Ben Bernanke used the phrase “global savings glut” in 2005 linking it to the U.S. current account deficit.[17]

In their July 2012 report Standard & Poor’s described the “fragile equilibrium that currently exists in the global corporate credit landscape”. U.S. NFCS firms continued to hoard a “record amount of cash” with large profitable investment-grade companies and technology and health care industries (with significant amounts of cash overseas), holding most of the wealth.[15]

By January 2013, NFCS firms in Europe had over 1 trillion euros of cash on their balance sheets, a record high in nominal terms.[16]

History

When the equity market bubble burst, in the early 2000s, companies in many industrial countries cut down on borrowing funds to finance their capital expenditures. They began running financial surpluses that they lent to other sectors of the economy.[14]

In 2003–2004 the non-financial corporate sector in member nations of the Group of Seven (G-7) held $US 1.3 trillion of corporate excess saving.[notes 3][14]

By 2011 Statistics Canada reported that Canadian business were “sitting on more than $583 billion in Canadian currency and deposits, and more than $276 billion in foreign currency”.[22]

During and after the Great Recession of the late 2000s levels of economic[23] and policy uncertainty rose dramatically contributing to the depth of the recession and the weakness of the following recovery with[24][25] many corporations globally and avoiding investments and increasing their cash holdings, in what has been called “liquidity hoarding”,[26] “cash hoarding” or “dead cash”.[5][6][7]

Cash kings

In March 2013 Moody’s Investors Service published their report entitled Cash Pile Grows 10% to $1.45 Trillion; Overseas Holdings Continue to Expand in their Global Credit Research series, in which they examined companies they rate in the US non-financial corporate sector (NFCS). According to their report, by the end of 2012 the US NFCS held “$1.45 trillion in cash,” 10% more than in 2001. At the end of 2011, US NFCS held $1.32 trillion in cash which was already a record level.[27] “Of the $1.32 trillion for all the rated companies, Moody’s estimates that $840 billion, or 58% of the total cash, is held overseas.”[27]

By the end of 2012 Apple, Microsoft, Google, Pfizer, and Cisco, “cash kings”, as Moody’s called them, held $347 billion at the end of 2012 compared to $278 billion in 2011.[27]

At the end of 2012 Ford Motor Company’s cash balance was $22.9 billion and was listed as ten on the list of U.S. non-financial corporation sector’s top ten cash kings by Moody’s Investors Service in their March 2013 annual report on Global Credit Research.[27][28]

Causes

In his article in April 2013 Federal Reserve Bank Economist, Kevin Kliesen investigated some of the causes of the “recent upsurge in hoarding of cash by firms” or “increased accumulation of cash on corporate balance sheets” in the United States. He suggested a number of valid reasons including “increased levels of economic uncertainty”, “increased competition, especially in the information technology sector” and ”

 

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