Jun 6, 2019

Too much money (and too few places to invest it)

Illustration: Lazaro Gamio/Axios

A truly bizarre trend is having an impact on the economy — wealthy people and corporations have so much money they literally don't know what to do with it.

Why it matters: At a time when growing income inequality is fueling voter discontent and underpinning an array of social movements, the top 1% of earners and big companies are holding record levels of unused cash.

The big picture: U.S. companies raked in a record $2.3 trillion in corporate profits last year, while the country's total wealth increased by $6 trillion to $98.2 trillion (40% of which went to those with wealth over $100,000).

So, where is all the money going? The IMF notes large companies around the world are overwhelmingly and uniformly choosing not to reinvest much of it into their businesses. They're hoarding it in cash and buying back stock.

"There are only 2 things that money can do — sit on a balance sheet unused, where it's just earned income earning an interest rate of zero," ICI chief economist Sean Collins points out. "Or it makes sense to release it to share buybacks or dividends."

  • Companies could pay their workers more, but "that would be terrible for the stock market," says Neil Shearing, chief economist at Capital Economics — half-jokingly.
  • Companies made a record $1.1 trillion in stock buybacks in 2018 and are on track to surpass that number this year. But they still have record cash holdings of close to $3 trillion.

Wealthy households and individuals are pouring money into asset managers, betting on companies that lose $1 billion a year, bonds from little-known Middle Eastern republics, and giving hot Silicon Valley start-ups more venture capital than they can handle.

But even that hasn't been enough to account for all the new money. The top 1% of U.S. households are holding a record $303.9 billion of cash, a quantum leap from the under $15 billion they held just before the financial crisis.

How we got here:

  • The Fed's quantitative easing program pushed the cost of borrowing money to next to nothing for nearly a decade, allowing companies to splurge on debt for mergers and acquisitions and to boost revenue.
  • At the same time, globalization allowed them to reduce labor costs, meaning that gains effectively were returned as profit and used by public companies to boost stock prices.

Between the lines: These factors, combined with legislative policies that have consistently favored business owners over workers, eroded unions and reduced employees ability to demand higher wages.

  • The Tax Cut and Jobs Act i.e., the Trump tax cut exacerbated these issues, slashing the share of U.S. taxes that companies paid to its lowest level in at least half a century and provided companies even more capital for buybacks, dividends and executive compensation.
  • "Perhaps the fallacy of the tax plan to begin with was companies were not starved for capital coming into this," Mark Hackett, chief of investment research at Nationwide, tells Axios. "They were starved for growth opportunities."

The end result is money that would previously have been split between businesses, workers and the government for projects like schools, health care and infrastructure is instead sitting in corporate accounts earning little to no return.

Go deeper: How depreciating money could save the global economy

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Coronavirus updates: World case count tops 600,000, Spain sees its deadliest day of outbreak

Data: The Center for Systems Science and Engineering at Johns Hopkins, the CDC, and China's Health Ministry. Note: China numbers are for the mainland only and U.S. numbers include repatriated citizens and confirmed plus presumptive cases from the CDC

Spain reported a record 832 coronavirus deaths in 24 hours — just one day after Italy reported nearly 1,000 deaths.

The big picture: The U.S. now leads the world in confirmed coronavirus cases, as the number of global cases nears 615,519. Governments around the world are trying to curb the medical and financial fallout of COVID-19, as infections surge across Europe and the U.S.

Go deeperArrowUpdated 29 mins ago - Health

Coronavirus dashboard

Illustration: Sarah Grillo/Axios

  1. Global: Total confirmed cases as of 9 a.m. ET: 615,519 — Total deaths: 28,687 — Total recoveries: 135,671.
  2. U.S.: Leads the world in cases. Total confirmed cases as of 9 a.m. ET: 104,837 — Total deaths: 1,711 — Total recoveries: 894.
  3. Federal government latest: President Trump signed the $2 trillion coronavirus stimulus bill to provide businesses and U.S. workers economic relief.
  4. State updates: Alaska is latest state to issue stay-at-home order — New York is trying to nearly triple its hospital capacity in less than a month.
  5. World updates: Italy reported 969 coronavirus deaths on Friday, the country's deadliest day.
  6. Business latest: President Trump authorized the use of the Defense Production Act to direct General Motors to build ventilators for those affected by COVID-19. White House trade adviser Peter Navarro has been appointed to enforce the act.
  7. What should I do? Answers about the virus from Axios expertsWhat to know about social distancing.
  8. Other resources: CDC on how to avoid the virus, what to do if you get it.

Subscribe to Mike Allen's Axios AM to follow our coronavirus coverage each morning from your inbox.

The one-minute coronavirus story

Illustration: Sarah Grillo/Axios

News about the coronavirus is so big and coming so fast that it's hard to remember what happened just last week, let alone last month.

Here's the quickest possible review of the story so far — how it happened and how the U.S. lost control.

Go deeperArrow46 mins ago - Health