Sunday 6th November, 2005

 

Free spending fosters economic growth

 
 
 
 
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In certain countries, there is a periodic release commonly referred to as the Consumer Confidence Index. This measure reflects the attitudes of consumers with respect to the health of the economy, based on what they hear. It tends to focus on business conditions and job markets.

If consumers feel good about their current situation, and future well being, they tend to spend freely. Free spending fosters economic growth.

On the other hand, if consumers are not confident about a prosperous future, because of job insecurity, or other factors, there will be a tendency to save more and spend less.

Less spending slows economic growth.

There are a few types of measurements that poll the sentiments of consumers. One survey investigates the level of confidence that consumers feel with respect to big

ticket purchases, such as motor vehicles and furniture.

Another survey seeks to identify willingness to spend dollars on short term purchases, like vacations. Yet another has as a focal point the consumers worries about job security.

The Consumer Confidence figures have been falling in the US, primarily due to the loss of jobs resulting from hurricane destruction, rising fuel prices, and political uncertainty. As the Fed raises interest rates, in a bid to check inflation, there is even greater uncertainty, and the Christmas shopping season there, does not expect free spending.

If they are focussed on savings, then we on the periphery need to align our visions with the developed world, since the ripple effect is likely to catch us in the lurch, should we hesitate.

If we were to poll consumer confidence, with respect to the unparalleled acts of crime levelled at the business community and their families in terms of kidnap rates, one can only imagine the measures that could manifest from a random sample.

The thing about savings advice is that the savings ethic has to be evident in the one giving the advice, in order for those receiving the advice to be convinced and so take action. Similarly, those seeking to control crime, and raise consequential consumer confidence, must appear to be clean as a whistle.

It is amazing how human behaviour is intricately intertwined, one dynamic with another. It is equally fascinating how quickly we loose focus, and how visions can blur, independent of age.

If consumer confidence is polled and shows up as an all time low, there would be justification to slow the spending, and stash the cash in safe, low to medium risk, investment vehicles.

Ironically, when inflation is climbing, and jobs are being cut, a kind of scramble

ensues, and necessary purchases jostle for priority. Often, there is nothing left over to save.

Or so it seems, until someone announces that it is guava season. That’s when you simply have to find places to save a few dollars, each month, in places where you simply cannot touch the build up.

Bank savings vehicles are typically short term. You can dip in and draw out all, in one to two years. Mutual funds ought to be medium to long term, but there is usually no penalty to withdraw or sell the units.

Such ease of access is a recipe for short term consumption.

There are two common vehicles that

fit the bill for long term savings: cash value life insurance and pensions or individual

annuities.

We simply cannot wait for things to get better, before we structure our long term savings agenda. Our confidence or lack of confidence in the systems that surround us, will manifest, its own monster, but we should not be dragged along.

—Raziah Ahmed is a registered financial consultant

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