The US Federal Reserve has provided a wonderful new example of the problems with spreadsheets.
It also shows how a naive belief in the credibility of any computer-generated output has come to over-ride common sense. In turn, policy can become based on myth, rather than reality.
The chart above from the Wall Street Journal shows a new revision by the Fed of the amount of cash being held by US companies. It turns out that companies have a massive $500bn less cash (blue line) than previously believed (red line). As the WSJ comments:
“More significant than the number itself, however, is how the revision affects the trend. Before the revision, the Fed showed corporations continuing to accumulate cash, with liquid assets rising nearly every quarter since the recession ended and reaching a record $2.2 trillion at the end of last year. Now, however, it appears corporate cash piles grew rapidly through 2009, then levelled off. Companies aren’t spending their cash, but they aren’t holding more of it, either.”
Equally, the new data shows that cash is just 5.7% today as a percentage of companies total assets, versus 6.3% at the end of 2009.
Errors of this kind matter greatly for policy. Policymakers wanted to believe that companies had great piles of cash, but were reluctant to spend it. Hence they hoped quantitative easing and stimulus programmes would build confidence and in turn persuade them to spend it.
However, this wishful thinking has proved to be exactly that. The reason companies aren’t spending money is simple – they don’t have it to spend. Common sense, rather than an obsession with computer models, would have given this answer long ago.