Sunday, September 23, 2012

In cash we trust

The global stock exchanges may have taken a hammering in 2011 but it appears the world's super rich have still managed to weather the economic crisis quite well, thanks to varied investments in fixed-term deposits, artwork and even diamonds. The world's rich the loss meant a modest and eminently manageable wealth reduction of 1.7 per cent. They still have a combined wealth of $42 trillion, according to the financial services company Capgemini SA and the Royal Bank of Canada. Germany's economy, for comparison, was worth 2.57 trillion last year.

However, no investor likes to lose money and the global political insecurity of the past year has had a significant effect on economic growth and stability, leading many investors to look to more secure financial products.

"Investors seem to be favouring retention of capital in cash and term-deposits,"
says Capgemini Consulting's Klaus-Georg Meyer.

Coca-Cola, with cash reserves of $17 billion, claims it has plans for growth in the United States and overseas, plus large payouts to stockholders. But other companies are reporting they are saving their reserves “for a rainy day,” because demand for their product is weak and there is little reason for expansion. So, the mood is sour, but we know the money is there.

 American corporations are sitting on a cash pile of about $US2 trillion, even though the interest on that money is tiny, and banks are likewise sitting on the money they are getting from the Fed in return for selling bonds and mortgages, or else they are using it to speculate. To work, capitalism requires long-term, illiquid bets to be made: someone has to build a factory or dig a mine. Cash reserves and other liquid assets and won’t invest because it’s not profitable. But these days cash is king.

No comments: