Cash hoarding and slow investments – evidence for the failure of QE

The total durable goods orders rose 3.3%, but capital goods orders fell. At the same time, Moody’s says companies in the United States are hoarding some $1 trillion of cash and not spending it to invest or hire. Seems rather unconnected, but to me, these are just another evidence that QE1 did not do its job, and QE2 will likely be the same.

The intention of quantitative easing is really to get the money into the system in hope that it will somehow go to places like businesses for them to expand. However, the visibility of the economy is in multi-year low now, so naturally businesses are not very keen to expand. If they are already hoarding cash, why should companies borrow to expand their businesses then?

There are views that companies are hoarding so much cash for now as there will be roughly $1.5 trillion of corporate debt to mature in the coming years, so companies refinance now to take advantage of low interest rates, and hoard some cash for the repayment of the debts. This is a valid view of course. However, the Fed printed so much money to flood the system, and all those companies take the advantage of the liquidity flood to borrow new debt in order to repay old debt. I hardly feel that it is a good sign for the economy.

The capital goods orders fell in September after gaining in August. This is probably a sign that companies are simply not investing. And they hoard money for now as they borrowed new debt and waiting for the old debt to mature. Whether you believe the “refinance” explanation of not, the message is quite clear: they are simply not investing.

They are not investing even they should have a record low cost of capital now because of lack of visibilities and lack of opportunities. So no matter how much money the Fed will dump, these companies will continue to do nothing but hoard cash.

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.