'Cash-On-The-Sidelines' Fallacies And Restoring The "Virtuous Cycle" Of Economic Growth

Tyler Durden's picture

As we explained in great detail recently, the abundance of so-called cash-on-the-sidelines is a fallacy, but even more critically the we showed the belief that these 'IOUs of past economic activity' would immediately translate into efforts to deploy them into future economic activity is also entirely false. Simply put,  there is no relationship between corporate cash and subsequent capital expenditure, nor is the level of capital expenditure even well-correlated with the level of real interest rates. At this point, as John Hussman explains, it should be clear that the mere existence of a mountain of IOUs related to past economic activity is not enough to provoke future economic activity. What matters instead is the same thing that always matters: Are the resources of the economy being directed toward productive uses that satisfy the needs of others?


The fallacy of cash piles on the balance sheet meaning strong balance sheets...

US companies are carrying far more net debt than in 2007


Another curiosity is this notion that US companies have substantially reduced their debt pile and are therefore cash rich. The latter is indeed true. Cash and equivalents are at historically high levels, but rarely do those who mention the mountains of corporate cash also discuss the massive increase in debt seen over the last couple of years.


In fact, debt levels have been growing to such an extent that net debt (i.e. excluding the massive cash pile) is 15% higher than it was prior to the financial crisis.


and Proposition 1: Corporate cash is high, and therefore, businesses should put that cash to work through capex.

Comments: This is the most obviously deceptive of the four propositions, hence Mark Spitznagel’s incredulous response when asked to address cash balances by Maria Bartiromo last week. As Spitznagel explained, it makes little sense to isolate the cash that sits on corporate balance sheets without netting the credit portions of both assets and liabilities. We last updated corporations’ net credit position here, showing that gradual increases in cash balances are dwarfed by rising debt.

A longer history further disproves the proposition; it shows that there’s no correlation between capex and corporate cash:

capex and cnbc 1


So how do we restore growth?

Via Hussman's Funds' Weekly Insight,

To the extent that such desirable activities exist – whether as consumption goods or as investment goods like machines, the act of bringing them forward not only engages existing resources (such as factory capacity and labor), but also creates new income that can be used to purchase yet other desirable products. This is what creates a virtuous circle of economic activity and growth. Not quantitative easing, not suppressed interest rates, not speculation. The resources of the economy must be channeled toward activities that are actually productive, desirable, and useful to others.

When this doesn’t occur – when companies produce output that isn’t wanted, when capital investments are made that aren’t productive, when housing is constructed at a pace that exceeds the sustainable demand and ability to finance it – the act of production and the resources of the economy are wasted. That is really the narrative of the past 14 years, and is largely the result of repeated bouts of Fed-induced speculation and misallocation. Robert Blumenthal recently wrote an excellent essay describing the economic costs of such “malinvestment.”

At the moment that a person uses their labor to produce something of value to others, that person’s own income is enhanced, and the ability to purchase the output of others is also created. As economist Jean-Baptiste Say wrote, “A product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value… Thus the mere circumstance of creation of one product immediately opens a vent for other products.”

In a healthy economy, the productive activity of one sector opens a vent for the productive activity of other sectors of the economy. The useful allocation of resources in one area of the economy reinforces the useful allocation of resources in another. Economic growth continues as the efforts of each sector focus on the production of those things that will be of demand and use to others. Each productive act is not simply an event, but contributes momentum to a virtuous cycle.

The difficulty emerges when something is brought into production that is not desired – that fails to align with the actual demand for it. In that event, the value of the product itself may be less than the value of the resources committed to its production. Since it is not consumed, it simultaneously becomes “savings” and “unwanted inventory investment.” Long-term growth is harmed, because economic effort and resources are wasted and fail to open a vent for other production. If this occurs at a large scale, jobs are lost, inventories build, and the economy suffers the long-term effects of misallocated activity.

When we review the economic narrative of the past 14 years, this is exactly what we observe.

The first insult occurred during the excesses of the tech bubble and the severe misallocation of capital that resulted. Next, in response to the economic downturn in 2000-2002, the Federal Reserve held interest rates down in the hope of reviving interest-sensitive spending and investment. Instead, the suppressed interest rate environment triggered a “reach for yield” that found itself concentrated in enormous demand for mortgage securities. Wall Street was more than happy to provide the desired “product,” but could do so only by creating new mortgages by lending to anyone with a pulse.

The resulting housing bubble became a second episode of severe capital misallocation, and led to the economic collapse of 2008-2009. In response to that episode, the Federal Reserve has now produced and largely completed a third phase of speculative malinvestment, this time focused on the equity market. On historically reliable valuation measures, equity prices are now double the level at which they would be likely to provide historically normal returns.  As in 2000, three-quarters of the record new issuance of equities is now dominated by companies that have no earnings. The valuation of the median stock is now higher than it was at the 2000 peak. NYSE margin debt as a percent of GDP exceeds every point in history except the March 2000 peak. All of this will end badly for the equity market, but the real insult is what this constant malinvestment has done to the long-term prospects for U.S. economic growth and employment.

The so-called “dual mandate” of the Federal Reserve does not ask the Fed to manage short-run or even cyclical fluctuations in the economy. Instead – whether one believes that the goals of that mandate are achievable or not – it asks the Fed to “maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”

What the Fed has done instead is to completely lose control of the growth of monetary aggregates, in an effort to offset short-run, cyclical fluctuations in the economy, so as to promote maximum speculative activity and repeated bouts of resource misallocation, and ultimately damage the economy’s long-run potential to increase production and promote employment.

In the face of our concerns about long-run consequences, some might immediately appeal to Keynes, who trivialized prudence and restraint, saying “In the long run, we are all dead.” But we are not talking about decades. The insults to the U.S. economy, to U.S. labor force participation, and to the long-term unemployed are the largely predictable result of policies that have been pursued in the past decade alone.

On the fiscal policy side, there are numerous initiatives that – when properly focused on productivity and labor force participation – could easily be self-financing for the economy in aggregate. Too much of our fiscal deficit has nothing to do with productivity or inducements that reward economic activity. Productive infrastructure (ideally projects that have large distributed effects, as opposed to notions like rural broadband), alternative energy, earned income tax credits, tying extended unemployment compensation to some sort of activity requirement (community, internship or otherwise), small business loans and tax credits tied to job creation and retention, investment and R&D credits, and other initiatives fall into this category. The objective is for the private markets to retain a vested interest and exposure to some amount of risk, so that losses and unproductive decisions remain costly, but also for fiscal initiatives to ease constraints that are binding on private decision-making.

On the monetary policy side, it’s simply time to change course to a far less "elastic," rules-based policy. With $2.5 trillion in excess reserves within the banking system, even one more dollar of quantitative easing is harmful because it perpetuates financial distortion and speculative activity while doing nothing to ease any constraint in the economy that is actually binding. Fortunately, it actually appears that the FOMC increasingly recognizes this, as attention has gradually focused on questions about policy effectiveness and financial risk, and away from the weak hope for positive effects. We will have to see how long this insight persists, but statements from FOMC officials increasingly reflect the intention to “wind down” QE, and emphasize the “high bar” that would be required to move away from that stance.

The cyclical risk for the U.S. equity market is already baked in the cake, and we view downside potential as substantial. The economy would allocate capital better, and to greater long-term benefit, if interest rates were at levels that rewarded savings and discouraged untethered growth in fiscal deficits. The economy would also allocate capital better if equity valuations were closer to historical norms (unfortunately about half of present levels given the extent of present distortions). While the capital markets are likely to undergo a great deal of adjustment in the coming years, we don’t anticipate systemic economic risks similar to the 2007-2009 period. We do observe a buildup of inventories in recent quarters that, combined with disruptions abroad, seem likely to contribute to economic weakness, but there are numerous episodes in history when stock market losses were not associated with steep economic losses.

The largest economic risks are particularly likely to emerge in Asia, where “big bazooka” central bank policies and speculative overinvestment have also produced large and persistent misallocation. China and Japan are of principal concern, though many smaller developing countries outside of Asia also appear at risk. Policy makers should certainly focus on areas where exposure to foreign obligations, equity leverage, and credit default swaps would produce sizeable disruptions. In any event, I believe it is urgent for investors to recognize the current position of the U.S. equity market in the context of a complete market cycle. As I noted in the face of similar conditions in 2007, my expectation is that any “put option” still provided by the Federal Reserve has a strike price that is way out-of-the-money.

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jmcadg's picture

Haven't I read this one before?

knukles's picture

Do not dispute this contention or you'll wind up broke, hungry and sleeping with Dennis Kneale as his manservant.

DoChenRollingBearing's picture

This is a great time to keep CA$H (some some in physical FIAT$) on the sidelines.

If ol' Dennis had some dough, maybe he wouldn't be sweating writing self-serving comments about his, erm, departure.

I'd rather not have Dennis do anything for me, uh, it might not go as expected, ah...

Ban KKiller's picture

Yes. Rinse and repeat. Oh...and be prepared, that is it. 

krispkritter's picture

Don't know why, but I was drawn to this article for some odd reason...

NoDebt's picture

Anytime sombody places their finger reasonably close to the artery of truth, it's difficult not to listen to the pulse for a while.

We've all felt it since 2008 at least.  The way they "saved" the economy was twisted and corrupt.  There was a genuine opportunity to clear out the dead wood.  That opportunity was squandered.  The drop would have been more severe in all likelyhood, but we would be climbing back from it RIGHT NOW on much stronger footing- a real recovery, not this perverted smoke and mirrors show.  

You wanna know why corporations are horading cash?  They know what we know:  nothing has been fixed.  It's only been spackled over by a flood of liquidity which will evaporate like a fart in the wind at the exact moment they need it most.

Freewheelin Franklin's picture

If you have a bad tooth, do you let it fester and rot and take handfuls of antibiotics and Tylenol and suffer a slow agonizing pain until the nerve finally dies, or do you rip the fucker out and suffer a lot of pain for a short period of time? 


Unfortunately, most people are pussies and wishful thinkers, and choose the former. 

LetThemEatRand's picture

So a guy goes to Vegas.  He starts losing.  Before the end of the night, he's down $250,000.  He's sold his car, traded in the title on his house, and maxed out his credit cards trying to get back to even.  He has $20K in borrowed cash left and he's standing at the black jack table with a pile of chips.  The Casino manager thinks to himself:  "that guy still has cash on the sidelines."

Angus McHugepenis's picture

Rand: Somehow that fits in with my St. Paddys Day bar tab.

And I lol'd and +1


Cattender's picture

Gold on the sidelines too.. and Silver and Bullets... and canned food...

CrashisOptimistic's picture

All that text and not a word about the only thing that matters.

Only oil matters.  It defined the 20th century and the build up to 7 billion people.  It will define the next few decades as that population plummets.

Economics is bullshit.  Only joules influx to the system from underground matters.  All the pieces of paper ever made from trees won't solve the need to push tractors around 50,000 acre farms to feed 7 billion mouths, and then move the calories resulting from those tractors to the stores.

Things are not going to get better, folks.  All this bullshit about productive allocation and serving customers is just so silly it is sad.  You don't serve customers if your products can't get shipped to them.

The party is over.  The police are coming.  Four of them.  On horseback.

LetThemEatRand's picture

I'm thinking Kerry is the pale horse.   What's his rider's name again?

knukles's picture


They're Famine, War, Pestilence and Dorkulus
Actually it's a pale burro

LetThemEatRand's picture

Behold a pale burro, and upon him rode Dorkulus.  

Has a certain ring.

Ban KKiller's picture

I understand that even at the current pricing that oil is cheap. Witness the growth at current pricing. OK...but I do also think oil can be replaced and will be replaced. Once disbursed energy creation is well accepted, maybe, we will rapidly replace oil. Yes, I think storage issues will be solved as well. Don't deny that it may be quite ugly and that what I believe may happen will happen after we have crashed head first into no oil... 

How far do we fall and how long do we stay down? Oh....and when? Ok...back to the chickens and garden for me, therein lay/lie the answers. How many eggs will I get. Simple stuff!

Party on Garth!

NihilistZero's picture

The peak oil stuff doesn't scare me.  Mankind has breached the sound barrier, put a man on the moon and split the atom.  A man from 1914 would shudder in awe at our achievements.  Whether a perfect example of Nuclear Fusion a few space stones away or our own planets immense heat energy just so many miles down, I believe our species will figure it out.   

caShOnlY's picture

NZ,  this is such a coincidence. 

I just had a Chevy-Mo 4x4 driving doodz with a gaggle of man toys plus a Harley in the garage and a pocket full of plastic bankers that never say no tell me the same thing.   I bet dilithium crystals will be the answer.

NihilistZero's picture


It must get pretty uncomfortable living in such a small box ;-)  Thank goodness the inventors among us don't suffer such a lack of imagination...




Poor Grogman's picture


maybe I can negotiate and buy one of the horses with some Bitcoin.

At least then I can get about ok...

analyzer_66's picture

Horsey's work good in nukular fallout?

Notarocketscientist's picture



High energy prices = less consumption because everything including the fuel in your tank costs more = layoffs = less tax revenue = government cutbacks, layoffs and debt increases = less consumption = more layoffs = less taxes =====  economic death spiral.


Compounding the problem is the fact that a weak labour market means real wages drop - as they are across the world right now - that means everything is more expensive and your buying power is dropping at the same time.


Governments recognize this and are trying to offset with debt, easy lending (they are purposely inflating bubbles), lower interest rates and money printing.


Of course they will fail - because the disease is expensive oil.  And there is no substitute


The economic death spiral will accelerate when the QE and ZIRP no longer have any effect and the confidence game collapses.


This moment will be known as the end of the industrial revolution by the few who survive.


This is not a Hollywood movie where the hero saves the day.  This is the reality we are facing.

tickhound's picture

No matter the consequences to life, health, balance or preservation... Grow consumption and production cuz it's virtuous, got it.

This article explains just how to do this, for those still interested.

ebworthen's picture

End derivatives/securitization/puts and calls, 20% down on a loan held for life by issuing bank, restore Glass-Steagall, tariffs on imports, no bailouts, end the FED.

Pretty simple; that is why it won't happen.

Motorhead's picture

Maria B. talked about this 'money on the sidelines' so much it was sickening.  Kurva.

LetThemEatRand's picture

She was thinking about "money on the nightstand."

analyzer_66's picture

or was it money after a one night stand?

mvsjcl's picture

They loan up to the gills in order to "buy back" stocks (debt). Sounds like a recipe for suckcess.

dumbStruck's picture

Overall a good article but I think maybe the biggest economic risks right now are geo-political, a sudden outbreak of economic and/or military warfare from the china and russian arena rather than a plain jane credit collapse out of asia, but that could happen as well.

Stanley Lord's picture

Debt is on the sidelines.

infinity8's picture

Chimps are so cute. . (whistling past the graveyard)

The Abstraction of Justice's picture

The Quantitative Easing Doomsday Device, Primed For Detonation


As part of my civil lawsuit against Deutsche Bank, I have been studying what one may call the calculus of crime - the elements of the banking system that lead to gold manipulation, elements that demand the suppression of precious metal prices as an inevitable part of the machinery of fraud. Not only the simple fraud, of insider trading, profiting from the difference between official and internal rates of exchange, but the greater fraud that keeps the banking system existent. Now that I understand the details I have become aware of what a great unexploded bomb it all is. And the primer charge is Quantitative Easing, ready to detonate at any hour.

Quantitative Easing (QE) is the system for exchanging bad banking debts with liquid currency. Bad debts include mortgage backed securities (MBS), but also certain types of government bonds that do not provide sufficient yields to protect banks from chronic shortages of currency. Most of the banks are in a state of perpetual depositor flight. Not earning any interest, due to governments' Zero Interest Rate Policy (ZIRP), depositors are leaking away, with many parties using bank accounts only for the underlying debiting systems, storing their real wealth in cash. Having studied the details, I am convinced that bank runs are not the real issue, as QE provides an almost unlimited source of liquidity. Should a bank literally run out of cash for their ATMs, then some software bug will be blamed, the bank in question will cease trading for a few days until the printing presses have rolled off enough notes to meet demand, and then the software bug declared fixed. Compensation is given to irate customers, but along with all bank fines, is simply added to the endless QE welfare bill. In a more serious run, the presses could in theory, limit printing to the higher denomination note. Terminal bank runs are therefore probably not the critical issue at the moment.

QE is often referred to, and thought of, in the singular. But of course, there are different systems worldwide. The Bank of England, for example, both holds the accounts as well as having the responsibility to print out the banknotes, in its primary role as central bank. In the USA, the Federal Reserve handles the accounts, while the US Treasury, a separate institution, is responsible for money printing. These are not trivial differences. If the MBSs underperform or too many banks rush to turn their electronic dollar positions into currency, the Federal Reserve can go bankrupt. This would result in all US banks losing both the QE pool, in addition to the assets they have already lost, transferred to the Federal Reserve's books - a deflationary vacuum bomb. The Bank of England is not so immediately vulnerable, but suffers from another problem, common to all QE systems, including that of the Federal Reserve, in that ZIRP makes it unfavourable to withdraw cash in the form of government bonds. ZIRP is not quite zero, and is somewhere between one quarter and one percent for all the various incarnations of QE. It is paid on the electronic positions held by the QE provider. Long term government bonds all offer less interest than these account positions. So what happens when interest rates go up, and the electronic positions can be redeemed in terms of bonds with significant interest rates? The answer is that the electronic positions, rated in the hundreds of billions of dollar (or pound sterling / euros), metamorph into street currency – an immense hyperinflationary explosion.

So the conclusion is this, when ZIRP ends, as it must, because ZIRP is inflationary and we are in an inflationary spiral, then QE in the USA will result in the bankruptcy of the US banks, while in the EU and the UK QE will result in hyperinflation. The financial collapse will therefore carry a precursor detonation event, the increase of interest rates, but will quite likely deliver two different forms of financial collapse. Governments, of course, can always make up their own rules, and edict the contrary type of collapse. The US may declare that the Federal Reserve can itself receive QE from the US Treasury, for example, or the Bank of England can simply refuse to undermine its own currency. In any case, the banks are finished the moment interest rates are raised by any significant degree.

There is one more conclusion, or theory, that is suggested, that gold manipulation, for the global fraudsters, is more urgent than ever. As an inflation hiding mechanism, if it were abandoned, then the absurdity and fraud of ZIRP would be instantly exposed. We can thus expect the precious metals to be hammered until the last minute. Any cessation of the suppressive mechanisms will be followed by interest rate rises, and thence Doomsday.

Exact details of each QE system is quite hard to come by, if anyone has more in depth information, please feel free to update me.


Mark Anthony Taylor – www.kingoftherepublic.com



yellencrash's picture

If I'm interpreting this correctly, then it would beone more big leg down for gold, huge rise in the dollar, flight from gold and foreign currencies into the dollar, eventual reversal and devaluation of the dollar as it the dollar becomes the final bubble and then China steps in and floods the marketplace, buying up assets with cash from t bill stockpile. I'm just a dumb layperso, but would love to hear responses to find out just how dumb.

The Abstraction of Justice's picture

No, with hyperdeflation, if thats the way it goes, with a bankfrupt Federal Reserve, production in the USA would come to an instant halt. The chorus ring across the country would be, 'Do you mind not being paid for a few months?'


You can figure that the economy would be so broken that the country will not exist any more, and dollars or gold, you'd not have anywhere to spend your money.

Johnny Cocknballs's picture

debt grows not only faster than the money supply, its growth accelerates, and increasingly accelerates relative to money supply.

This is not complicated.  Debt-based fiat and fractional-reserve checkbook currency creation has a finite life.  It requires Keynesians with Ivy League degrees to fool the world into thinking it is sustainable.

Misallocation of capital, while it can hardly be overstated, is still a footnote to the basic systemic problem - a model requiring infinite growth to avoid debt/interest collapse.

I'm sure others have made this very, very simple point, but it is a point staring us in the face....  we're worrying about getting more gas for a car that is approaching a cliff....

Seasmoke's picture

May as well fill 're up, as I'm already over my Exxon credit limit. 

yellencrash's picture

Time for Obama to incentivize fuel production from U.S. sources.That's meaningful production that has a shared distribution benefit, AND a national security benefit that can now be justified in compromise to the environmental tradeoffs. I do agree with Prechter though that there will be Dow 1000 in this decade. Partly just because it seems so unthinkable and laughable to the Cramers and even Roubinis of the world.

itstippy's picture

The limited CAPEX that is happening is aimed at increasing productivity by reducing labor and raw material inputs.  The technologies available today (robotics, container shipping, computerized global distribution systems, others) have made past economic models completely obsolete.

Increased liquidity from the Central Banks now leads to lower employment and more "hot money" speculation in dubious new "financial products".  It no longer stimulates the real economy.

Carter Caburators is not going to take ZIRP financing and build a massive addition to their St. Louis factory, employing an additional 2,000 union wage workers.  Sorry, that era is over. 

csmith's picture

Thus the genius of the Fed...an endless supply of IOUs.

assistedliving's picture

must be tough being John.  so smart and wrong for so long

hairball48's picture

And YOU, of course, have been right all your life.


Julian's picture

The Long Run is now...this is what people forget

RottenAlpha's picture
Notarocketscientist's picture

"The resources of the economy must be channeled toward activities that are actually productive, desirable, and useful to others."

And therein lies the rub - we are OUT of CHEAP resources.  So there no way to keep the virtuous cycle going - and that is why we get QE - ZIRP - out of control corruption etc...


The machine is DYING.   These are the last desperate gasps of a system that is reliant on an infinite supply of cheap fodder (i.e. resources) - without that growth ends - civilization as we know it ends


See the presentation here http://www.youtube.com/watch?v=TFyTSiCXWEE


Notarocketscientist's picture

Oh - and without cheap oil forget about food - 2% of the world's arable land is farmed organically - the rest is farmed with oil and gas pesticides - without them the soil is DEAD.  As in it will grow NOTHING - and it takes 3+ years of organic inputs to rectify that.


7.2 billion people - without food - what does that look like?


You are already DEAD.

Notarocketscientist's picture

Watch this goddam mining presentation goddam it --- when you are through you will understand that wailing at the Fed - screaming at Obama - discussing and debating the shit on this site day after day --- all tempests in teapots.


THIS is the one and only issue that is of any relevance to what is happening and where we are going http://www.youtube.com/watch?v=TFyTSiCXWEE

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