Deflationary buybacks

This WSJ markets commentary is an interesting addition to the cash reserves vs. corporate bailout arguments that are these days inflating.


At the crux of the analysis is the clarification, which is necessary I think, that cash is not actually cash. Cash is in fact an investment decision, a position in the active market and in the strategic plan.

Holding cash usually means holding interest-bearing liquid marketable securities (even if indirectly through a money market fund or savings account) which, all things being equal, pushes up their price. In other words, this drives interest rates down. Strategically, the decision to build up cash reserves implies that internal reinvestment is not expected to produce greater value for the business than the interest earned on these positions.

In essence, cash hoarding is deflationary, whether it’s a cause or an effect, and deflationary spirals tend to loop the two in any case. The cash unit today is expected to have greater purchase power tomorrow… or, if building up reserves towards a rainy day, demand for non-financial assets diminishes. Prices fall.

These things can’t be taken out of context though. And in context of the new economy – technified, digitized, and global – deflationary pressures are built in. The comment about software eating the world is a comment about deflationary economics. It’s also a comment about the evolution of digital global platforms that become dominant with time (e.g., Apple, Google, Amazon, Microsoft, Facebook) and get to hoard not only cash but also market share.

Stock buybacks, in this context, aren’t necessarily about greed (although perhaps that too) but about a natural market reaction to these rapidly changing and global-scale realities. It’s natural for markets to want stock prices to rise, which fundamentally becomes a challenge that financially can be engineered, even in a deflationary environment.