These Two Statistics Reveal What is Really Happening with Money

By Bob Brooks

February 2, 2015

Lately, we have been discussing deflation on the Prudent Money Radio Show.  Deflation is an economic condition where prices of everything declines. It is the opposite of inflation where prices go up.  This involves everything from retail to the stock market.  It slowly happens over a long period of time before it has fully consumed the entire economy. 

There is a whole list of signs that deflation is starting that process with our economy.  This morning two more key signs have arrived.

During deflationary times,   the consumer pulls back on spending and save more because of two dynamics.  First, the consumer is waiting on prices to fall lower.  Why buy today when prices will be lower tomorrow?  Second, the consumer is saving money out of fear of the future.

Consumer spending is historically strong during Christmas spending season in December.  Retailers lower prices to rock bottom level and run all types of credit specials to induce the consumer to spend money.  During this Christmas shopping season consumers have had the benefit of sub $2 dollar gas prices.  This is like getting a raise.  During December 2014, consumer spending dropped for only the 6th time in 55 years.  In fact, it was the second largest drop out of those 5 times. 

Further, annual consumer spending (12 months of spending) typically exceeds the total amount of money consumers hold in bank accounts.  As a whole, consumers spend more than they keep in their checking/savings accounts in most years. 

Last year, consumer spending total 11.9 trillion and money kept in bank accounts totaled 11.9 trillion.   According to behavioral expert Dr. Dan Geller, this was a first.

This was a chart he posted in a release this morning.

What does all of this mean?  Although lower prices are great for the consumer, deflation is like an economic cancer that slowly spreads and consumes.  It is an unusual phenomenon that one might see in a lifetime. It can stay around for a long time.  It is not good for investment markets nor is it good for the economy.  As I have said on the radio show, we want to watch these signs very closely.  In the event that this continues to build, a protection strategy will be warranted for stocks and bonds. 

Although the signs are building that this is coming, deflation is not a foregone conclusion. That is the good news.  However, if we are still talking about this at mid-year, we could be on the cusp of a big problem.  

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