The Economist USA 03.21.2020

TheEconomistMarch 21st 2020 61

1

H

ouseholds are frantically stocking

up on essentials such as loo roll. But in

financial markets, the staple that no one

can do without in times of stress is cash—

the flushing mechanism of the world econ-

omy. In theory, it should never dry up;

money can be printed. But when firms are

desperate for cash it puts a potentially dev-

astating strain on the plumbing of the glo-

bal financial system. That is why in the past

week America’s Federal Reserve has un-

leashed a huge amount of liquidity. Foreign

central banks have joined in. Many face the

additional challenge of a strengthening

dollar (see next article).

Unlike the 2007-09 financial crisis,

when problems in the financial system

caused an economic meltdown, the spread

of the covid-19 disease has caused a health

and economic crisis that has caught banks,

financial markets and business in its wake.

Big and small firms realise that they are fac-

ing— at the least—months of scant rev-

enues, yet still have bills and debts to pay.

Some are better equipped than others

(see left-hand chart). The operating ex-

penses (opex), like wages and rent, of all

nonbank s&p 500 companies in 2019

amounted to $2.6trn. The same firms held

$1.7trn in cash and liquid securities at the

end of that year. On average, that was about

seven months of opex. But this cash is un-

evenly distributed. Apple could pay for six

years of opex with its $200bn war chest.

Many big utilities, such as Edison Interna-

tional, carry only enough cash to cover a

week’s worth.

The quickest way for investors, firms

and banks to raise cash is to sell liquid as-

sets. Investors moved first. Their priority

was to liquidate holdings of risky assets,

like stocks and high-yield bonds, and buy

safe assets like Treasuries. Markets moved

accordingly: the s&p 500 has sold off hard

and fast (see right-hand chart) and bond

yields rallied. But companies and banks

tend to hold their liquid assets in Treasur-

ies. When their need for cash became dire,

they dumped even these.

Asset sales help reallocate the stock of

existing cash. For every investor selling

stocks or bonds to raise cash, there are

those willing to take the other side—like

Warren Buffett, the fabled “be greedy only

when others are fearful” investor, who held

$125bn in “dry-powder” at Berkshire Hath-

away, his investment firm, at the end of

2019. He has already snapped up shares in

The cash crisis

Down the drain

NEW YORK

A plumber’s guide to how America’s financial system seized up

Flushedaway

Sources:Bloomberg;DatastreamfromRefinitiv

0

-20

-40

-60

10

1

0.1

0.01

0.001

0.1 1 10 500100

Operating-expenditure-to-cash ratio

Debt-to-market-capitalisationratio

→Firmwillrun

out of cash quickly

↑Firmisheavily

indebted

2007

(^19872000)
1980
1973
1970
Daysintocrash
6646005004003002001001
2020
GeneralElectric
Edison Int’l
Apple
S&P 500, non-financial firms, 2019 or latest
log scale
S&P 500 crashes, cumulative % decline
relative to peak
Finance & economics
62 Buttonwood:Marketcapitulation
63 Thesurgingdollar
64 Closingstockexchanges
64 Thevalueofexchange-tradedfunds
65 Free exchange: A history of slumps
and rebounds
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