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.