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I invite you to listen to my latest radio interview on Market Wrap with financial expert Moe Ansari revealing how money anxiety impacts financial and investment decisions.

You will hear about the link between the level of consumers’ financial anxiety and their decision to save or invest money.  You will learn about the impact of such financial decisions on the financial industry and the economy.  And, you will discover how consumers make risk-based decisions in financial investments.

To listen to this short interview, just follow this link and click on the audio player at the bottom left of the home-page screen.


 
 
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I will be a guest on the "Your Money Talks" Radio Show on Thursday May 22nd at 7:40 am Pacific Time.  The program focuses on how we really make financial decisions and what truly drives our decisions to save money and to buy products and services.

I hope you will be able to tune in. The program can be heard in Orange County and the Greater LA Inland Empire on KSPA am 1510 and KFSD am 1450 in North San Diego County.  You can also listen live from your computer by going to www.FInancialNewsandTalk.com and click on "listen now" button for either station in the left hand side of the page. 


 
 
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Escalating financial conflict with Russia is increasing money anxiety among consumers and is halting the economic recovery in the U.S.

The Money Anxiety Index (www.moneyanxietyindex.com) shows signs of consumer concern over the financial and economic conflict with Russia in response to the events in the Ukraine.  May’s Money Anxiety Index is nearly flat at 74.0 after a substantial improvement in April due to the positive news on the employment front.

The heightened level of money anxiety among consumers, resulting from the financial conflict with Russia, is already taking its toll on the US economy.  Last week, the ten-year U.S. Treasury bonds dropped to 2.54 percent after yielding 3.03 percent at the end of 2013.  The decline in long-term borrowing cost is a sign of weakening economy and an attempt to revive the recovery with cheaper money for borrowers.  Another aspect of the uneasiness among consumers about the economy is the decrease in mortgage rates.  Last week, the average 30-year fixed mortgage rate dropped to 4.17 after reaching a high of 4.54 in December of 2013.

Prior to the financial conflict with Russia, the prospects of accelerating economic recovery in the second half of this year was strong.  However, a nearly flat 1st quarter GDP at 0.1 percent, and decreasing long-term interest rates, are increasing the level of money anxiety among consumers and even at the Fed.  Last week, during her testimony before Congress, the Fed chairwoman, Janet Yellen, expressed concern about the softening of the economy and signaled that the Fed will keep rates lower for possibly longer than originally projected in order to reenergize the economic recovery.




 
 
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Pricing has two dimensions – competitors and consumers. When you price your deposits based only on the competitive landscape, you are assuming that consumers respond to rates in the same way all the time. This assumption is incorrect. In reality, consumers respond to rates based on the principles of behavioral finance.

The governing principle of behavioral finance is that consumers make intuitive decisions during stressful economic times, as a result of high money anxiety, and shift to analytical decision-making mode when economic conditions improve. The implication of this principle is that financial institutions can price deposits differently during various levels of money anxiety. Here is a case in point illustrating the power of money anxiety over consumer financial behavior..MORE.

 
 
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The $17.5 billion, 6.7 percent, increase in consumer credit in March sounds good and promising, but further analysis by the Money Anxiety Index (www.moneyanxietyindex.com) shows that the makeup of this increase indicates that consumers are still reluctant o expand credit spending beyond absolute necessities on items such as education and transportation..

Most of the increase in credit, $16.4 billion, was in nonrevolving credit mainly from an increase in student loans and auto loans according to the G-19 credit report from the Board of Governors of the Federal Reserve System. These two loan types represent necessary expenditures and not discretionary spending that typically come with greater economic and financial confidence.  The increase in student-loan debt to over $1 trillion is taking its toll on the economy because it burdens the next generation of consumers with heavy debt that is preventing or delaying their home purchase; an essential driver of the US economy.

The increase in auto loan during March is not a sign of economic recovery or economic strength either.  Further analysis presented in the book Money Anxiety (www.moneyanxiety.com) shows that the increase in car purchases is mainly because consumers delayed replacing their cars during and post the recession.  According to the U.S. Department of Commerce, car sales decreased to a low of $47 billion in March 2009, which was at the tail end of the Great Recession. Now that cars are getting older, and the cost of maintenance is increasing, consumers are forced to borrow money to buy new cars since transportation is an absolute necessity.  Car sales is gradually increasing now mostly as a result of ageing car fleet.


 
 
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Linda Federico-O'Murchu, Special to CNBC
"Geller studies people and money—specifically, the way people perceive risk in speculative business ventures. According to his research, there is a correlation between people's expectations and their level of money anxiety. In other words, if there is a 50/50 chance of losing $100, people will likely expect their win to be twice the amount of their loss; in times of high anxiety, people expect to win four times the amount of the loss". More...


 
 
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Historically low interest rates on bank deposits dipped below inflation rates and eroded the buying power of consumer savings by nearly $600 billion since the beginning of the Great Recession. 

This analysis shows that the average interest rate on bank deposits was lower than the average annual inflation rate in five of the last six years eroding consumers’ savings by $594 billion.  During the six years since the beginning of the recession, the average annual inflation rate exceeded the average interest rates on deposits with the exception of 2009, which had an annual deflation rate of -0.40%.

The table shows the annual deposit balances and the average rates from the FDIC, and the average annual inflation rate from the Bureau of Labor Statistics for each of the six years since the beginning of the Great Recession:

The nearly $600 billion in buying power consumers lost from their bank deposits is mainly because they made an intuitive rather than analytical financial decision to shift deposits from term (certificate of deposits) to liquid accounts (checking, savings and money market) during t6he last six years due to high level of money anxiety.  In the six years from 2008 to 2013, consumers increased their liquid accounts balances by 89%, yielding only an average annual return of 0.62%, while decreasing their term accounts balances by 37%, which could have yielded them a yearly average of 1.39% during each of the past six years. 

The reason consumers shifted their bank-deposits from term to liquid accounts is based purely on their intuitive decision process.  Research presented in the Money Anxiety book clearly demonstrates how consumers tend to make an intuitive decision to hoard “Mattress Money” during times of high money anxiety.  Mattress Money is a financial behavior phenomenon whereby consumers feel greater sense of security by shifting their money to liquid accounts thus feeling that their money is more attainable to them in times of need; much like placing their money under a real mattress.

Had consumers made an analytical decision to leave the money in term account during the past six years, they could have preserved the erosion in the buying power of their savings.