As the economic recovery remains tepid, companies continue to sit on piles of cash, shifting it around internally rather than spending it.
The hoard totals about $1 trillion for U.S. companies, Reuters reports, citing data from Moody's. For non-financial companies, the total is about $943 billion as of the middle of 2010, compared to $775 billion at the end of 2008, Moody's said.
Even though revenue decreased in the second quarter, corporate profits in the S&P 500 were up 38 percent from the same period last year, the Wall Street Journal reported earlier this month. Thanks to massive cost-cutting strategies, such as firing employees, it was corporate America's sixth highest quarterly profit ever.
Banks, which also have large cash reserves, used that money to pad their earnings reports, the WSJ says. Of the combined $16.8 billion that the 18 biggest U.S. commercial banks earned in the third quarter (not counting the $10.4 billion charge that stained Bank of America's earnings report), $8.1 billion came from their reserve funds, the WSJ says. At some banks, the contributions from these rainy-day funds outweighed the actual earnings. Of Citigroup's $2.2 billion profit, for instance, 92 percent, the WSJ says, came from its reserves.
According to the WSJ, banks didn't want to prettify their profits. There are rules that say they have to free up cash reserves as soon as it becomes apparent that they don't need them. JPMorgan CEO Jamie Dimon, the WSJ says, called the rules "silly."
With interest rates near zero, banks and other companies can borrow money cheaply. But, as the New York Times pointed out earlier this month, the readily available cash won't stimulate the economy unless banks actually put it to use.
Charles Evans, president of the Federal Reserve Bank of Chicago, said earlier this month that the U.S. economy is in a liquidity trap, in which low interest rates don't spur spending. Companies and timid consumers gather piles of money and simply sit on them -- as the NYT put it, "because they can."
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