The $7.7 trillion dollar question

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Think austerity is inevitable because there simply isn't enough money? Think again.

Non-financial corporations in the US, Europe and Japan are sitting on an astonishing $7.7 trillion in cash or equivalents, according to global banking association The Institute for International Finance. That's more than three times the annual GDP of the UK, held in cash by big corporations.

Technology giant Apple now has a cash hoard nudging $100 billion. By the end of the next quarter this figure is expected to grow to more than the entire US government education budget; by the year's end it is expected to be greater than all the corporate taxes collected in the US in 2009.

These hoards, sometimes referred to in technical terms as "cash piles", are proving to be a significant brake on the world economy.

Since the crash in 2008 corporations have tended to focus on boosting their balance sheets rather than investing. This is partly a result of regulatory pressure from governments to "deleverage" - which means to increase the amount of equity companies hold in proportion to debt. It's also because companies have little faith that there will be decent growth in the near future. This is, of course, something of a self-fulfilling prophecy, as this lack of investment helps to drive up unemployment and stunt growth. With interest rates near zero, borrowing costs are very low. Even so, last year companies like Google and Apple issued their own bonds, raising even more cash while benefiting from low interest rates.

Corporations are making the recession pay, just as they made a killing during the years of growth.

Since the 1970s the proportion of national income that goes towards wages, as opposed to profits, has fallen. In the same period income inequality has risen sharply. So, not only have profits been boosted by a shrinking wage bill, but wages themselves have been redistributed from the bottom to the top, with the very highest paid being the main beneficiaries.

The logic is simple. Boom they win, recession we lose.

Governments and central banks have been doing their bit, pumping cash into the private sector. But companies in the main have not rehired the staff they sacked in the wake of the 2008 crash. Fearing further bank collapses and sovereign defaults, they have continued to cut costs, usually through wage freezes and redundancies, without investing.

The $7.7trillion cash pile amounts to what financial commentators describe, again in technical language, as a "bazooka" - a sum large enough to significantly lift the global economy if invested. But while the weapon is loaded, no one is willing or able to pull the trigger.

This is a stark illustration of two critical failings of capitalism. Firstly, the cumulative effect of each separate firm acting rationally to protect their profits is totally irrational as a way of safeguarding the system as a whole. Secondly, the looting of public services and pensions, and the shedding of jobs are an attempt to claw back from workers the enormous subsidies handed out to private sector bosses. Much of the money saved is simply being hoarded by big firms which are rebuilding their balance sheets.

Whenever they lose, we lose more.

The structure of capitalist competition ensures a bosses' solution to the economic impasse remains distant, the path back to growth tortuous and uncertain.