Robert Higgs of the Independent Institute is a distinguished economic historian, author of several books, expert on the Great Depression and arguably the creator of the concept of “regime uncertainty.”
This concept simply states that economic investment (and therefore growth) is stymied because entrepreneurs are uncertain (and often nervous) about the public policies politicians are readying to impose upon the market place.
In this blog post, Higgs sheds light on some recent news about corporations holding on to their cash that indicates to him that the U.S. economy continues to struggle, in part, due to regime uncertainty.
The large cash holdings may also reflect presently prevailing regime uncertainty — the inability to confidently forecast how the government will treat private property rights in the future.
At present, interest rates are so low that a firm sacrifices little by holding cash, rather than, say, securities or other assets promising payoffs within the next few years. The longer term remains clouded by uncertainties associated with the government’s pending initiatives in energy, environmental policy, health care, financial regulation, taxation, warfare, monetary policy, and other key areas. The possibility exists that policies will be adopted that spell ruin for thousands of firms, especially those that hold illiquid, long-term assets whose values will be adversely affected by the new policies.
It comes as no surprise, then, that firms are clinging to huge hoards of cash. True, it’s only fiat money, and the Fed may destroy a great chunk of its value before long, but with cash one has the ability to move quickly to shift investments and cut the losses, whereas longer-term assets may lock firms into positions from which they will find it difficult to bail out without great losses when the next government-spawned crisis hits.