For the generation that survived the Great Depression, storing greenback bills in a mattress rather than putting money in the bank may have made sense. Cold, hard cash, after all, didn’t depend on institutions that could fail for value and was easily usable in case of an emergency and extremely portable. In our own era of (relatively) stable banks, stockpiling money doesn’t make as much sense. But the wealthiest one percent of the global economy is actually holding a large chunk of their assets in cash, according to the 2014 World Wealth Report from Capgemini, which has been carrying out annual studies of high-net-worth individuals for the past 18 years.
The study surveyed individuals with over $1 million in “total investable financial assets or wealth,” says Bill Sullivan, Capgemini’s global head of market intelligence. That means money that “they have available to invest in different areas” outside of fixed costs like primary residences. Besting investment categories like real estate and equities, cash “continues to be the highest allocated investment globally,” Sullivan says. More than 26 percent of all high-net-worth individuals’ investable assets are held in cash, down from 28.2 last year. And it’s not just individual investors—Apple is holding on to almost $160 billion of cash and cash-equivalents, and CNBC notes that non-financial U.S., European and Japanese companies are sitting on $5 trillion, twice the amount they were a decade ago.
So why isn’t this money being put to more productive use instead of sitting around in the equivalent of enormous mattresses?
As inflation gradually decays the value of currency over time, you’re more likely to lose money just holding on to it rather than investing. But always having assets at the ready is tempting.
The phenomenon of the wealthy stockpiling money instead of investing it in business ventures or funds has been called “cash hoarding,” writes investigative journalist David Cay Johnson in an Al-Jazeera op-ed. Cash hoarding is both driven by and intensifies the effects of the financial crisis. Cash is the most liquid store of value we have, so in times of economic hardship, it’s a good thing to carry a lot of it on hand—unlike money stored in a bank or an investment fund, it can be instantly exchanged for whatever’s needed. But when cautious investors are holding on to the cash just in case disaster strikes, it impedes overall growth. “The economic engine sputters when profits are not recycled through the economy,” Johnson writes.
As inflation gradually decays the value of currency over time, you’re more likely to lose money just holding on to it rather than investing. But always having assets at the ready is tempting. The stockpile means “having cash available for investments,” Sullivan says. Even the slight dip to 26.6 percent cash from 28.2 percent suggests a greater willingness to risk outlaying money in the hopes of profit. “Last year there was a marked preference for preserving wealth rather than growing,” Sullivan explains. “There’s a big shift in that this year, with 28 percent of investors focused on preserving rather than 45 percent last year. We’re starting to see an increased focus level toward growth.”
That focus on growth also entails “a shift toward increasing comfort toward making investments outside of home market,” Sullivan says. Investors are looking abroad for opportunities. Yet the wealthy in North America and the Asia-Pacific region are the most likely to invest their money at home, at rates of 68.1 and 67.5 percent, respectively.
Sullivan sees this increased willingness to invest as a positive sign for the entire economy. “What we have found is that behaviors typically start with ultra-high-net-worth individuals [those with over $30 million in investable assets]—they’re the first-movers,” he says, “then the high-net-worth individuals following quickly, then you see Main Street following them.” In other words, the 2014 World Wealth Report could represent the start of a domino chain leading the economy further out of recession. But this reiteration of trickle-down capitalism also has holes.
CRITICS OF THE ONE percent’s tendency to hold on to capital rather than put it into play in the wider economy are arguing for policies that make it harder for cash to stay static. Harvard Business School professor Mihir Desai has been particularly vocal about his ideas for a tax on “excess cash holdings” for corporations. “With the returns on their cash holdings approximating zero, managers would have to explain to their investors why earning a negative 2 percent return would make sense as opposed to either investing or disgorging that cash to shareholders,” he explains in a 2010 Washington Post op-ed.
The same policy could be put into place for high-net-worth individuals, encouraging the movement of funds around the capital system. It’s a self-perpetuating cycle for growth where expanding companies meet expanded demand from consumers: “A cash-reserves tax would increase the cost of not investing,” writes Alejandro Ruess in Dollars & Sense. “By spurring new spending, it would create the demand needed to justify the new investment.”
This concept is similar to a “demurrage fee,” or a carrying cost for money. Under a demurrage system, cash that’s being held is liable to a tax that slowly decreases its value. The policy was attempted in Austria in 1932 (the fascinating paper bills had spaces for stamps that noted the gradually lessening value) and has roots as far back as the medieval era and ancient Egypt. Freicoin, a Bitcoin-like crypto-currency, also uses demurrage, with a 4.89 percent depreciation every year. The net effect is to increase the “velocity” of money moving around the economy—rather than staying stagnant, it’s constantly traveling to new places it can be useful.
If high-net-worth individuals are leading the economy, then the slow move toward more spending and greater global risk that the Capgemini report shows may bode well for recovery. But if free-market capitalism is actually one of the economic principles driving the American upper class, then perhaps policies should be put into place to discourage such high percentages of stockpiling. If more money is allowed to flow around the economy rather than held as a de-facto insurance policy, investors may find that just-in-case mentality unnecessary.