We just posted the second in our new Big Question video series, featuring Booth professors John Cochrane, Amir Sufi and Steven Davis. The subject matter is suitably large—why the US economy isn’t growing faster.
Cochrane, the self-styled Grumpy Economist, has a fascinating observation towards the end of the session, in which he calls corporate cash piles—widely seen as a problem for the economy—“an unheralded and wonderful thing.”
“The huge amount of cash—we're just following the money demand curve,” Cochrane notes. “When interest rates are zero, there's no cost to holding a lot of extra cash. And I actually think this is—The money demand curve is pretty much what it always has been right out to the low interest-rate part.”
“This is actually an unheralded and wonderful thing about the current environment—that rather than the high-tech finance overnight repo, clever stuff that all fell apart, companies can now at zero interest rates just hold a lot of cash. And there's that nice cash buffer, they're not losing any interest from doing it. We shouldn't regard this as something unusual in that cash being not put to work or something. It's a perfectly natural portfolio decision when interest rates are zero and there's no cost to doing it.”
Is the Grumpy Economist in danger of sounding, well, joyful?