One of Ludwig von Mises’ most insightful parts of Human Action is his discussion on the reason to hold a cash balance. By using his construct of the “evenly rotating economy”, Mises shows that the only reason why an individual would not hold cash is because he is fully certain of his future monetary expenditures.
Every individual knows precisely what amount of money he will need at any future date. He is therefore in a position to lend all the funds he receives in such a way that the loans fall due on the date he will need them. Let us assume that there is only gold money and only one central bank. With the successive progress toward the state of an evenly rotating economy all individuals and firms restrict step by step their holding of cash and the quantities of gold thus released flow into nonmonetary—industrial—employment. When the equilibrium of the evenly rotating economy is finally reached, there are no more cash holdings; no more gold is used for monetary purposes.
Turn the reasoning around and you can see that greater cash balances imply a greater uncertainty as to the future.
There has been much discussion of the sharp increase banks’ excess reserves over the past six years. Now we find out that billionaires are also hoarding cash.
According to the new Billionaire Census from Wealth-X and UBS, the world’s billionaires are holding an average of $600 million in cash each—greater than the gross domestic product of Dominica. That marks a jump of $60 million from a year ago and translates into billionaires’ holding an average of 19 percent of their net worth in cash.
Nor is this jump in cash holdings a phenomenon of the super-wealthy. Those who are merely wealthy are getting in on the act too:
[L]arge cash holdings aren’t specific to billionaires—millionaires and multimillionaires are also holding cash hordes, on the order of 20 percent to 30 percent of their net worth.
Some might view this as indicative of the general unease generated by the market at the moment. Of course, Mises would say that the market is always at a state of unease given that it deals with unknown future values. A better explanation for the sudden jump in cash balances is that investors just don’t know what to expect the future to bring.