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Deflationary Psychology: Consumers Hoard Money

Consumers are more likely to make purchases when they're optimistic about the future than when they're pessimistic.

In recent times, consumer optimism was at its height during the 1990s bull market.

But the rate at which money changes hands (money velocity) in the U.S. economy peaked in 1997, and has since been trending downward. Money velocity did trend upward between 2003 and 2007. But at the top of that rise, money velocity was still well below the 1997 peak. Since 2007, the velocity of money has been on a downward slide.

Today, the rate at which money changes hands is even slower than what it was during the 2007-2009 financial crisis.

Consumers appear to have shifted into a deflationary psychology.

Read this excerpt from a Sept. 2 CNBC article titled, "Fed: US consumers have decided to 'hoard money'":

One of the great mysteries of the post-financial crisis world is why the U.S. has lacked inflation despite all the money being pumped into the economy.

The St. Louis Federal Reserve thinks it has the answer: A paper the central bank branch published this week blames the low level of money movement in large part on consumers and their "willingness to hoard money." The paper also cites the Fed's own policies as a reason for consumers' unwillingness to spend.

Though American consumers might dispute the notion that inflation has been low, the indicators the Fed follows show it to be running well below the target rate of 2 percent that would have to come before interest rates would get pushed higher.

That has happened despite nearly six years of a zero interest rate policy and as the Fed has pushed its balance sheet to nearly $4.5 trillion.

Much of that liquidity, however, has sat fallow. Banks have put away close to $2.8 trillion in reserves, and households are sitting on $2.15 trillion in savings—about a 50 percent increase over the past five years.

You can read the entire article by clicking on the link below:

http://www.cnbc.com/id/101963821