When people turn financially conservative, they tend to spend less and save more.
That’s part of what may be called a “deflationary mindset.”
As the 2020 edition of Robert Prechter’s Conquer the Crash states:
The psychological aspect of deflation and depression cannot be overstated. When the trend of social mood changes from optimism to pessimism, creditors, debtors, investors, producers and consumers all change their primary orientation from expansion to conservation. As creditors become more conservative, they slow their lending. As debtors and potential debtors become more conservative, they borrow less or not at all. As investors become more conservative, they commit less money to debt investments. As producers become more conservative, they reduce expansion plans. As consumers become more conservative, they save more and spend less.
Is “the trend of social mood” now in the process of shifting from optimistic to pessimistic?
Well, read this excerpt from an August 28 Marketwatch article titled “U.S. households and small businesses have stockpiled a mind-blowing record cash pile of almost $17 trillion”:
U.S. households and small businesses have stockpiled a record cash pile of almost $17 trillion — a mind-boggling estimate that exceeds the $16 trillion in fiscal action undertaken by governments around the world to keep the global economy afloat during the pandemic.
That domestic cash hoard has grown exponentially since February 2020 due to three factors: direct government stimulus payments to individuals, shutdown-induced savings from Americans working from home, and small-business decisions to hold onto grants or loans, according to… a Memphis-based manager at fixed-income dealer FHN Financial, which tracks cash flows.
The magnitude of the cash positions being held is surprising considering the tendency of households and businesses to tap their savings during each of the two or three recessions prior to the pandemic era. After the coronavirus pandemic triggered a deep two-month U.S. recession starting in February 2020, what is different this time around is that savings have soared despite the economy reopening. Two reasons have been offered for this: small businesses look to be focused on rebuilding inventories to brace for pent-up demand, while individuals are opting not to spend money on even the more restricted services and experiences that have now become the norm.
This stockpiling of cash suggests the possibility of a developing deflationary psychology.
Cash will be king during a deflationary depression, so it’s a good idea to start storing some away, if you have not already begun doing so.
Let’s return to Conquer the Crash for an example of how the demand for cash soared in recent history:
When access to credit [in Cyprus] was curtailed in 2013, there was a soaring demand for cash — the one thing nobody had. A March 26, 2013 article in The Financial Times reported, “The most immediate problem confronting businesses was a scarcity of cash.” A businessman in Cyprus said, “The market is operating on a cash basis — everybody wants cash.” That was the immediate result of deflation in Cyprus.