What is Consumer Confidence?

By Dr Boyce Watkins, appearing as a guest here on Cure Money Madness.

If you listen carefully to the words of Treasury Secretary Henry “Hank” Paulson and Ben “Big Ben” Bernanke (chairman of the Federal Reserve) you might notice a trend in their language. The word “confidence” is used a lot when they speak. Many of their monetary proposals are not necessarily valuable for their financial power, but also for their psychological power.

Some of you may wonder what confidence has to do with anything. After all, if you’re broke, confidence doesn’t exactly put money in your pocket. If you’re 100 pounds overweight, confidence won’t help you win the Olympic 100 meter dash. When you are flying on a crashing plane, confidence doesn’t keep the plane from slamming into the ground. But confidence is important to an economy, and one of the most significant drivers of economic growth. In fact, over confidence has driven US economic growth for the past 10 years. Here are some reasons that confidence matters in the minds of Hank and Big Ben:

1) Confident consumers spend money

If you think you might lose your job next year, are you going to max out your credit cards? I certainly hope not. If you are worried about being able to make ends meet, are you going to buy that big screen TV? Not unless you want your wife to leave you. So, even if it doesn’t hold any truth, the mere forecast of a weak economy is enough to make many Americans hold off on consumer spending, one of the great driving forces of the American financial system.

2) Confident companies invest money and hire workers

Investments involve risk. Your hunch may work out, and it may not. If you don’t believe the economy is getting better, you are not going to consider taking that risk. No one plans to go to the beach if the weather man says that it’s going to rain. When economic rain is in the forecast, companies pull out their umbrellas and hold off on new projects. This reduces the number of jobs in the economy, because nearly every job created in America is the result of someone making an investment.

3) Confident Americans do not take their money out of banks

In case you didn’t know, your bank does not have your money. Your money is part of a large base of financial capital that is loaned out to individuals and consumers seeking to get a good return on their investment. So, without investing, your bank would have no interest in paying you any interest at all. So if, say, 30% of all customers of the same bank decide to get their money out at the same time, the bank would have serious financial problems. It is a lack of confidence that could cause customers to “run” on their bank and take out their money.

4) Confident investors keep their money in the stock market

The stock market is a place where fortunes are made and lost. Some part of that fortune is psychological, given that no asset can have a value which exceeds that which someone is willing to pay for it. When investors lose confidence, they take their money out of the stock market, and reductions in demand for stocks lead to massive paper losses in the market. Additionally, most Americans are “momentum traders”, meaning that when the market goes up, they tend to buy more, and when it goes down, they tend to sell. History shows that it is actually the opposite approach that tends to work best.

5) Confident banks make loans

Banks have to keep a certain portion of their funds on hand at all times to meet federal requirements. If they are fearful that their customers might come and demand their cash, they hold onto their capital to ensure that it is available. If they are afraid that their borrowing customers will not be able to repay loans due to a weak economy, they also hold back on issuing new loans. The truth is that when economic forecasts are grim, conservative bankers become even more fearful than the rest of us.

The bottom line of this article is that confidence matters. So, the next time you hear Ben Bernanke give a speech, you can be confident that he is going to use language that makes you feel more secure. Whether you choose to believe those words is up to you.

Dr. Boyce Watkins is a Finance Professor at Syracuse University. He does regular commentary in national media, including CNN, BET, ESPN and CBS.

For more information, please visit his blog :  www.boycewatkins.com.

A few blogs on consumer confidence I thought you would also enjoy :

If you’re like most investors, in the last few months you sold your stocks at the bottom and bought gold at the height or bought T-bills or stowed your money in a savings account. But the only successful response to a market decline is to buy; it’s always been a poor move to sell equities when everyone is in a state of panic. My advice is to take the cash you’ve stuck under your mattress and buy equities.  Here’s why:  96% of the 10-year periods since 1926 have been positive and 89% of the time, equities performed better than bonds.  Given these probabilities, the rational decision is that if you’re investing for  the long run, at least 50% of your money should be in a diversified portfolio of domestic and international equities. That’s the way to benefit from this crisis:  Buy low, stop watching the market on a daily basis and then rebalance to return to your desired equity allocation (in this example, 50%).

Here are some usefull links relating to this post :

Q :  Can you please provide specific and concrete steps for releasing the  limiting beliefs around money I currently have and replacing them with new and expansive beliefs.

A : The first thing is to become aware of your feelings during every financial transaction you make:  investing, saving, spending, talking about what dinner cost, giving your kids their allowance, responding to a charitable request.  What is your belief about money in every situation?

Now ask yourself:  what would your life be like without that limiting belief?  The answer to that question will be the seed for the creation ofa new curative money message.

Some blogs I found about Money Beliefs :

Question : Given the current state of affairs even on the international financial scene, what considerations should I give to investing my $50k? Is this a bad time for any new investing? (my wife and I are brand new to anything more than money market funds)

Spencer : The funny thing about the financial markets is that it is possible to make an absolute statement:  Buying low has ALWAYS been a successful strategy.  Not sometimes, always.  Given that guarantee, you have an amazing opportunity right now to buy companies at a huge discount.

Some articles of interest  :

With Central Bank’s all over the world making the decision to buy stakes in privately held banks along with statistics showing that most investors have capitulated by the end of last week (more money was liquidated from equity mutual funds last week than any other week in the last few months, which just goes to show that left to our own devices, human beings as a group prefer to sell low than to sell high), this is an excellent time to let go of your own money madness and invest.

In other words, if we examine the investing world objectively without our emotions (which hardly ever guide us wisely in crisis situations), we find that everyone who bought in past situations like this made a fortune in the subsequent 10 years.  So instead of thinking about what might happen, think about the common sense wisdom of buying low, which has always, always worked, and buy a diversified portfolio today.

Some other blogs I found about investing now  :