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Home Publications Blogs Beat the Press Consumers Are Spending, Cash in Checking Accounts Means Alternative Investments Are Not Good

Consumers Are Spending, Cash in Checking Accounts Means Alternative Investments Are Not Good

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Saturday, 19 July 2014 07:50

The Washington Post really has to discover the Commerce Department. It is less than a mile from the WaPo office. Furthermore, if they had access to the Internet, they could get economic data from the Commerce Department in seconds.

If the WaPo knew about the Commerce Department and the data it produces it would not have told readers told readers in a headline:

"Amercians' checking accounts are filling with cash, but they are afraid to spend it."

The Commerce Department's data would have told them that they actually are spending at a fairly rapid clip. The saving rate for the first quarter of 2014 was 4.4 percent. That's somewhat higher than when the wealth effects from the stock and housing bubbles were leading to consumption booms in the late 1990s and the middle of the last decade, but well below the 8-plus percent average for the pre-bubble decades. In other words, there is no doubt that people are spending a lot relative to their incomes.

The accumulation in checking accounts reflects how people opt to save their money. ("Save" just means not spend. From an economic perspective, burning your cash is also a form of saving, since you would not be spending it.) With interest rates on money market funds and other short-term assets very low, it is understandable that people would not bother to transfer their money out of their checking accounts. The same story applies to longer term bonds which also carry a risk of capital losses. And, with price-to-earnings ratios that are higher than normal levels, people can also anticipate lower than normal returns on stock. 

In short, the decision to hold money in checking accounts is easily explained as an asset choice. It is not an alternative to spending, which we know is actually fairly strong.

Comments (4)Add Comment
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written by PeonInChief, July 19, 2014 12:18
Interest rates for small accounts are so low that it doesn't make sense to waste the energy to ladder CDs. The money makes not much more than money in a savings' account.
Alternative Investments Have Been Very Good
written by Paul Mathis, July 19, 2014 1:30
Index stock funds, such as Vanguard or Fidelity total stock market index fund, have returned over 20% annually since the market hit bottom in March, 2009. Even if you waited until a year ago to get in, you still made 25%.

Of course Obama haters would never take the risk of stock market investing until another W comes along.
Bank fees
written by bakho, July 20, 2014 8:34
There is not much interest earned on savings accounts and not much difference between savings and checking. Banks pile of huge fees ( much more than the difference in interest) on bounced checks. Thus it make sense to keep money in checking rather than savings. If you are saving for a long period you buy a certificate. If you might have a big purchase in the next year, you want the money in savings.
The amount in savings drops when parents pay tuition and other back to school costs.
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written by MacCruiskeen, July 20, 2014 12:32
I don't think the commerce department numbers are really relevant to what the blog post was talking about: people wanting to have more of a cash buffer in their bank accounts than in the past, because they don't feel secure enough to do otherwise. It is true that in a low-interest rate environment, it doesn't much matter where you keep your money, so you might as well keep it in the most easily accessible place: your checking account. And the overall savings rate is still pretty low. But that doesn't mean the article was actually wrong: The crash of the bubble highlighted how little people were prepared for job losses and emergencies. The recovery feels insecure, and Wall Street has not been made trustworthy. The model of the stock market has been pump-and-dump for the past 30 years in cycles of increasing magnitude, so it is entirely reasonable to take precautions in expectation of the next dump.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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