Monday, January 10, 2011

The Demand to Hold Cash Balances Continues to Decline

AP reports:
A steady decline in layoffs is giving the vast majority of adults who have jobs the confidence to spend more freely and help energize the economy. They no longer worry so much about losing their jobs.

Their renewed confidence has boosted retail sales — just what's needed to spark what economists call a "virtuous cycle": Higher consumer spending raises company profits, which spurs hiring, which fuels more spending and growth.

Consumer spending is critical because it powers about 70 percent of the economy. It rose for five straight months through November, kicking off the strongest holiday shopping season since 2006. Many shoppers are showing enough confidence to splurge on new cars: Auto sales rebounded 11 percent in 2010, the first increase since 2005.

"The strongest showing for consumers since the peak years of the last expansion signals that the broader economy is near a threshold of self-sustaining growth," analysts at Citi Investment Research & Analysis wrote last week.

Federal Reserve Chairman Ben Bernanke echoed that point Friday. He told a Senate panel he sees evidence that a "self-sustaining" recovery is taking hold because consumers and businesses are spending more.
Spending is up, but this doesn't "boost" an economy. Only production of goods does that. The more production the better.

The increased spending is an indication that the extreme desire to hold cash balances is ending. Eventually this will transfer into price inflation, especially given that Bernanke is aggressively printing money at the same time.

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