Why the super-rich continue to hoard cash
A general view shows luxury boats at a port in Monaco. Photo by Patrice Masante, Reuters
LONDON (UPDATED) - As tension over inequality simmers, persistent cash hoarding by multinationals and the super-rich may be one measure of how seriously attempts at remedial action are being taken.
The political heat over soaring income and wealth gaps in the United States, Britain and much of the developing world has built up since the credit shock and global recession of 2008/09.
Even though protest groups such as Occupy failed to gain traction much beyond 2011, the evidence of inequality continuing to balloon so soon after such a seismic economic bust has refocussed the minds of economists, politicians and voters.
There's little doubt the richer are getting much richer.
Last week's annual CapGemini/RBC survey of investors worldwide showed the number of households with more than $1 million in investable wealth rose almost 15 percent to 13.7 million in the year through 2013. Their total wealth rose almost 14 percent to $53 trillion, it estimated.
Both the ranks of the rich and their collective wealth have now risen 60 percent since 2008, the survey showed, and those fortunes are expected to rise a further 22 percent by 2016.
By contrast, world economic output has expanded just 16 percent over the past five years and the slow, sub-par recovery and subdued wage growth for most workers sharpens the political divide. Near zero interest rates and money printing designed to kickstart credit growth and job creation helped stabilise the situation but has had the side-effect of inflating the financial assets and real estate holdings of the richest even further.
What's more, anger has risen over a disproportionate hit taken by ordinary taxpayers for repairing government finances even as corporate and wealth tax rises were largely eschewed.
Policies adopted since the 'Great Recession' have clearly done little to balance the scales on personal wealth. And International Monetary Fund analysis shows more countries have cut corporate taxes over recent years than raised them - even as most countries have increased personal taxes.
But with U.S. mid-term elections due in November and UK parliamentary elections early next year, political pressure is mounting again. Cutting through the rhetoric is tricky, but some feel we may be on the cusp of action.
"Consumers and workers are paying far more than corporations to finance governments’ austerity efforts," said Luca Paolini, strategist at Swiss asset manager Pictet. "This is politically unsustainable and is sure to reverse."
If that view's widely held, you would imagine those with the money are already braced for it.
And one glaring and enduring observation of the post-crisis years is the extent of cash hoarding by large companies and the wealthy. This at least partly reveals the level of anxiety among these groups that changes to taxation or income regimes are only a matter of time.
Estimates of the amount of cash that non-financial U.S., European and Japanese companies are sitting on is as high as $5 trillion - twice the levels of 10 years ago as capital expenditure and investment has largely seized up. A pick up in mergers and acquisitions this year is modest by comparison with bloated balance sheets.
Moreover, the CapGemini/RBC survey showed rich investors still stored a whopping 27 percent of their expanding portfolios in cash or equivalents through last year - more than they held in any other asset class and twice pre-crisis levels.
With cash now effectively losing money when adjusted for inflation, that's an extraordinary level of caution. But for many it may be a price worth paying for keeping money highly liquid and geographically mobile if a domestic tax hammer is about to come down or profit margins are to be squeezed.
Many economists reckon the fear is simply due the dire state of the world economy and expectation of paltry growth for years to come. Others reckon it's exaggerated due to the overvaluation of conventional assets from super-easy monetary policy and quantitative easing everywhere.
Yet worries about a political backlash to stabilise inequality are intertwined with growth worries.
Although IMF studies show higher taxes and redistribution are generally benign in terms of growth impact, uncertainty about how those policies are implemented and "future game rules" holds back investment today, said SEB chief economist Robert Berqvist.
With the 'effective' tax rate paid by U.S. firms having fallen some 18 percentage points below the statutory 37 percent rate, there may be good reason to fret on that score.
Paolini at Pictet pointed to G20-led initiatives to clamp down on aggressive corporate tax avoidance - such as recent 'tax inversion' M&A activity in which U.S. pharma firms target Irish-based peers to avail themselves of super-low Irish taxes.
And a forecast rise in the effective U.S. corporate tax rate by 3 percentage points over the coming years as a result of these measures could lower profit growth by one percent a year, he estimates.
To that, add pressure for income rebalancing that will crimp corporate profits further. Higher minimum wage proposals are on the table in the United States, Britain and Germany and could eventually halt the decade-long decline in real U.S. wages.
The ultimate pincer movement by the authorities would be to find ways to tax unproductive cash holdings themselves. Zero interest rates are already doing much of the work on that score and negative rates are no longer taboo.
But the fact that cash continues to pile up regardless shows the depth of the concern that change is at hand. "Business conditions are about to become harsher," Paolini said.