Fear and Uncertaintly Take Toll on Spending

http://www.thefiscaltimes.com/Articles/2011/03/27/Fear-and-Uncertainly-Take-Toll-on-Spending.aspx

This article explain one reason why the economy may be taking so long to recover. The beginning of the article talks about how Baby Boomers are extending their retirement age and are much less likely to take any risks with their money. They are very unsure about how or when the economy is going to recover, leading them to save more and spend less. We talked about saving and consumption in class. In order to boost the economy we need individuals to put more money in the economy. But people are very nervous to put their hard earned money into an economy that is on the rebound. They feel that saving there money is a much more secure decision.

The recent recession and downturn of the economy has seemed to leave quite the scar on consumer's confidence. The confidence of again, the baby boomers seemed to be hit pretty hard. The article says many of them faced great losses and are now making decisions mainly based out of fear. A majority of them have increased their retirement age by at least a year since 2007. This shows their uncertainty in the future of the economy. The article also states that even though in the last 18-months there has been an increase in household wealth but it is still much lower than pre-recession periods. This again comes from consumers want to save more than consume.

An interesting point the article makes is that a majority of the baby boomers lost as much as years income when the market was hit but there was also a portion of them who gained from the recession. But yet when interviewed they all had very similar answers. The families felt they needs more money saved to deal with emergencies or other unexpected events. This increased the saving rate. Remarkably, the families who gained during the recession because even more cautious than those who lost money.The article also hits on the idea of the "wealth effect"; which is when households see an increase in their assets which causes an increase in their consumption. We also talked about this in class; it makes sense if you have more money you are more likely to spend more money. But because the economy is so shaky people are doing the exact opposite.