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Middle class Americans are expected to have enough cash reserves to survive 2-3 months in case of an emergency. Why is this expectation not in effect for an airline that makes vastly more profit per capita than the average household?Individuals and households have tremendously higher risk variability than companies, because most of the time there are only one or two major sources of income. When one or two of those incomes are interrupted it blows a giant hole in household cashflow.
A large company, however, is not dependent on individual relationships with sources of income. Each customer is a source of income, there are potentially millions of them. Losing 1 or 10 or even a thousand customers doesn't blow a giant hole in cashflow. There are correlations in those flows, but it's never 1.0.
Until now.
But let's assume we go ahead with the idea that every major company should hold 3 months of cash. For starters, that's 3 months of at least revenues, which is going to be one and sometimes two orders of magnitude larger than profits. Assuming that your profit is something like 10%, you're now holding something close to three years of profit on-hand, earning approximately bugger-all. Your shareholders will lynch you.
But suppose they don't lynch you. Is that the best use for your cash? Is it the use that genuinely reduces your overall risks? Almost certainly not. You could use that cash to pay for more R&D, more equipment, more and better-paid staff, improvement programs, to buy promising technologies, invest in other companies, pay down loans on larger, more modern and more-efficient factories ... the list goes on and on. By choosing to hold that cash against a catastrophic event, you greatly increase the much more mundane, but still fatal to the company, risk that you will be out-engineered, out-manfuactured, out-marketed, out-sold by competitors.
But suppose that everyone does it anyway. Now another COVID-19 style risk hits everyone simultaneously. What happens? The first thing that happens is that spending on anything that's not immediate ceases. So the money that we held back and didn't spend on investing in the future becomes joined by cancellation of all similar spending out of the rest of our income. So no net gain there.
The rest of the money gets spent on keeping the lights on. If there's a crisis big enough to halt the economy for 3 months, then it's not really going to halt the crisis for 3 months. It will be much longer than that. So everyone decides to hoard their cash and begins cutting everything, everywhere they can, to stretch it out. So the cash doesn't get spent over 3 months, it gets spent over 12 months.
But suppose everyone decides to spend at the 3-month rate anyhow. What happens next is that everyone's bank is suddenly facing a massive simultaneous drawdown in capital. They will almost immediately exceed their capital limits and now, they have to suspend lending. A whole bunch of otherwise companies get killed by the loss of credit liquidity.
But suppose we didn't put all of it in cash-at-bank? Well, we're still boned. If everyone begins to sell their bonds, shares, gold coins and stamp collections at once, prices crater. 3 months of reserves is now worth 2 weeks on the open market.
You've probably guessed that the only way out of this is to pool risks. Normally insurers do this, but insurers know that they cannot withstand correlated risks like pandemics, so they simply don't insure them (with rare and very expensive exceptions).
What we're seeing now is that fiscal and monetary policy is being used as "insurer of last resort". It's never been done on this scale before. It might never again.
All of which is to say that there's a lot to criticise about modern finance and managerial economics, but the idea that it's identical to household finances is very misleading.