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The U.S. economy will fully recover when the amount held in bank accounts by consumers will go below 50 percent of GDP.  In the last 20 years, the amount of money consumers held in bank accounts was consistently below 50 percent of GDP up until the beginning of the Great Recession, when it climbed up to 57 percent.  Prior to the Great Recession, the percentage of consumer bank savings to GDP ranged from 39 to 47 percent.  The increase in the percentage of bank savings to GDP represents about $2 trillion in additional savings since the start of the Great Recession.  

When the amount of bank savings, as percentage of GDP, is growing, it means that less money is available for spending and investment.  Since nearly 80 percent of the economy, or GDP, is made up of consumer spending and investments (the remaining 20% is made up of government spending), the economy stagnates when consumers divert more of their disposable income to bank savings.  Had consumers kept their bank savings at the same pace as they did prior to the Great Recession, the U.S. economy, or GDP, should have been nearly $2 trillion bigger today - $19 trillion as oppose to about $17 trillion currently.

The reason consumers accelerated the pace of their bank savings by $2 trillion since the beginning of the Great Recession is because they experienced a higher level of money anxiety due to uncertainty about employment, housing and investments. Prior to the Great Recession, the Money Anxiety Index stood at 58.6 compared to 71.6 today; an increase of 13 index points.  Research in behavioralogy (behavioral finance) clearly shows how higher level of money anxiety results in greater savings as an instinctive reaction to economic uncertainty.  


The Money Anxiety Index measures consumers’ level of financial worry and stress.  Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid 1960s.  The Money Anxiety Index Is highly predictive.  It signaled the arrival of the Great Recession over a year prior to the official declaration of the recession in December of 2007.   The money Anxiety index and concept are empirically demonstrated in the book Money Anxiety available in paperback and eBook formats in all major online booksellers such as Amazon, Barnes and Noble, Google Play and iTunes store.



 
 
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FOMC stated that the economy is growing only moderately but it did not say that nearly $2 trillion that normally be used to stimulate the economy is sitting idle in bank accounts.

The U.S. economy is “short” $2 trillion. This money is sitting idle in bank accounts instead of stimulating the economy with consumer spending and investments. In the five years since the end of the Great Recession, consumers incrementally increased bank savings by about $2 trillion relative to GDP compared to the five years prior to the Great Recession.  As a result, bank savings, as percentage of GDP, grew from 45.5 percent prior to the recession to 54.7 percent after the recession – an incremental increase of nearly $2 trillion.

When the amount of bank savings, as percentage of GDP, is growing, it means that less money is available for spending and investment.  Since nearly 80 percent of the economy, or GDP, is made up of consumer spending and investments, the economy stagnates when consumers divert more of their disposable income to bank savings.  Had consumers kept their bank savings at the same pace as they did prior to the Great Recession, the U.S. economy, or GDP, should have been nearly $2 trillion bigger today - $19 trillion as oppose to about $17 trillion currently.

In order for the economy to pick up steam, the $2 trillion in excess savings needs to be diverted back to spending and investment, which will bring the amount of bank savings to its pre-recession level of about 45 percent of GDP.  However, for this to happened, consumers need to have a lower level of money anxiety.  Prior to the Great Recession, the five-year average for the Money Anxiety Index stood at 58.6 – 13 points lower than its current level of 71.6.  

 
 
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September preliminary Money Anxiety Index came in at 71.6, the same level as in the previous month. However, the September Money Anxiety Index is 1.2 points lower than in July indicating that the jolt in July was temporary due to concerns over the economic and financial conflict with Russia, which now has subsided in lieu of the talks between the presidents of Russia and Ukraine.

A more stable level of money anxiety among consumers in September likely to improve GDP performance in the 3rd quarter of this year as consumers tend to increase personal consumption when their level of money anxiety is lower.  Conversely, as demonstrated in July, consumers reduce their personal spending when their level of money anxiety increases.  Personal consumption in July declined $12.0 billion compared to an increase of $51.2 billion in June, a variance of $63 billion cased by higher level of money anxiety.  

The Money Anxiety Index resembles a rollercoaster thus far this year.  In the 1st quarter, the index increased 1.3 points to 79.2 then dropped 7.9 points in the 2nd quarter to 71.3, after which it increased 1.5 points during the July jolt, and lately dropped 1.2 points to its current level of 71.6.  These fluctuations in the Money Anxiety Index are an indication of consumers’ uncertainty about the direction of the economy and, as a result, their own personal finances.


 
 
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July’s personal consumption expenditures fell 0.1 percent in a first such drop since January of this year.  The decrease in personal consumption corresponds with the increase in the Money Anxiety Index in the first two month of the 3rd quarter.  During July and August, the Money Anxiety Index increased 1.5 points, from 71.3 to 72.8, paving the way for the decrease in personal consumption in July and most likely in August.

Personal consumption in July declined $12.0 billion compared to an increase of $51.2 billion in June, a variance of $63 billion cased by higher level of money anxiety.  Durable goods purchases, which include automobiles, appliances and other high-ticket items, decreased 0.6 percent in July after increasing 0.5 percent in June.  The increase in the Money Anxiety Index in the 3rd quarter thus far is an indication that consumer consummation is likely to be much lower than originally forecasted, thus lowering GDP expectations for the 3rd quarter of 2014.

The increase in the level of money anxiety starting in July is caused by concerns over major geopolitical events, especially the worsening economic and financial conflict with Russia over Ukraine. The link between the level of money anxiety and consumer spending has been empirically demonstrated in the book Money Anxiety.  Research shows that when consumers feel more financially anxious, they reduce their spending as a reaction to their instinct for self preservation.