Monday, February 23, 2009

A Confidence Game

The state of the economy is must see TV every night. It's like watching a bad reality show or a very slow, very gruesome train wreck. Seriously, it is engrossing. Given all the expert opinions and such, it can be easy to lose site of an important fact - the economic recovery is a confidence game.

Think back to 2004. You know, back when you had just bought that new Cadillac Escalade to park in your track home that was so new the paint was still tacky to the touch. Did you give a second thought to buying that gas hog? Not a chance. After all, this is what everyone did. You bought a house and then a bunch of toys. If you needed money, you could just refinance your home. Intelligent cocktail party discussion consisted of debates over how low rates had to go before you could refinance again.

Looking back, those days seem tragically funny compared to now. Of course, looking back always involves 20/20 vision, but there is something at the heart of those times that has fundamentally changed now - confidence. One of the biggest issues confronting us as a nation and, indeed, a world is consumer confidence. In technical terms, this phrase refers to an analysis of how you will shop for things. I am talking about something else.

What are you doing with your money these days? Obviously, you try to pay your basic bills for housing, energy, food, clothes and so on. What about any additional cash that you have? Are you going out and spending it or are you holding onto as much of it as possible because you aren't sure how you'll be doing a few months from now? My definition of consumer confidence is simple. If you are going out and spending the money now, then confidence levels are high. If you are hoarding it, then your confidence levels are low. Guess what you, me and most people are doing? We're hoarding it.

No comments: