Credit or Cash?

Read the full report (PDF)

On December 8, the Federal Reserve released a new report, The Flow of Funds Accounts of the United States, a quarterly statistical depiction of financial flows and holdings across the country. The report tells the tale of two economies: one drowning in debt, the other overflowing with so much cash that it doesn't know what to do with it.

For families:

• Record debt. Household debt is at a record high (121.2 percent) as a percentage of disposable income. This means that families are more burdened by their debt than ever before.
• Record reductions in home equity. Families have cashed out more home equity than ever before, $113 billion in the third quarter alone. This means families are financing more of their consumption by reducing their home equity-a trend that is not sustainable without further wage growth.

For companies:

• Highest cash holdings in nearly 40 years. Corporate cash holdings totaled 6.2 percent of their assets in the third quarter of 2005. Cash holdings for the last four quarters are at their highest level since 1966.
• Less investment. Instead of using the additional resources generated by high profits for productive investments, corporations are using their money to spread the wealth to their shareholders. Typical mechanisms are dividend pay-outs and share repurchases that help to boost share prices. Fewer dividend pay-outs relative to corporate profits have been largely compensated for by higher share repurchases.

Read the full report (PDF)

Read also:

• Taking Charge, by Robert Gordon and Derek Douglas