African American Expert Boyce Watkins speaks with Free of 106 About Financial Lipo! Pt. 3

Dr. Boyce's Tips On How To Become A Confident Consumer

Keeping Your Confidence While In The Financial Crisis

by Dr. Boyce Watkins
http://www.boycewatkins.com/

If you listen carefully to the words of Treasury Secretary Henry “Hank” Paulson and Ben “Big Ben” Bernanke (chairman of the Federal Reserve) you might notice a trend in their language. The word “confidence” is used a lot when they speak. Many of their monetary proposals are not necessarily valuable for their financial power, but also for their psychological power.

Some of you may wonder what confidence has to do with anything. After all, if you’re broke, confidence doesn’t exactly put money in your pocket. If you’re 100 pounds overweight, confidence won’t help you win the Olympic 100 meter dash. When you are flying on a crashing plane, confidence doesn’t keep the plane from slamming into the ground. But confidence is important to an economy, and one of the most significant drivers of economic growth. In fact, over confidence has driven US economic growth for the past 10 years. Here are some reasons that confidence matters in the minds of Hank and Big Ben:

1) Confident consumers spend money
If you think you might lose your job next year, are you going to max out your credit cards? I certainly hope not. If you are worried about being able to make ends meet, are you going to buy that big screen TV? Not unless you want your wife to leave you. So, even if it doesn’t hold any truth, the mere forecast of a weak economy is enough to make many Americans hold off on consumer spending, one of the great driving forces of the American financial system.

2) Confident companies invest money and hire workers
Investments involve risk. Your hunch may work out, and it may not. If you don’t believe the economy is getting better, you are not going to consider taking that risk. No one plans to go to the beach if the weather man says that it’s going to rain. When economic rain is in the forecast, companies pull out their umbrellas and hold off on new projects. This reduces the number of jobs in the economy, because nearly every job created in America is the result of someone making an investment.

3) Confident Americans do not take their money out of banks
In case you didn’t know, your bank does not have your money. Your money is part of a large base of financial capital that is loaned out to individuals and consumers seeking to get a good return on their investment. So, without investing, your bank would have no interest in paying you any interest at all. So if, say, 30% of all customers of the same bank decide to get their money out at the same time, the bank would have serious financial problems. It is a lack of confidence that could cause customers to “run” on their bank and take out their money.

4) Confident investors keep their money in the stock market
The stock market is a place where fortunes are made and lost. Some part of that fortune is psychological, given that no asset can have a value which exceeds that which someone is willing to pay for it. When investors lose confidence, they take their money out of the stock market, and reductions in demand for stocks lead to massive paper losses in the market. Additionally, most Americans are “momentum traders”, meaning that when the market goes up, they tend to buy more, and when it goes down, they tend to sell. History shows that it is actually the opposite approach that tends to work best.

5) Confident banks make loans
Banks have to keep a certain portion of their funds on hand at all times to meet federal requirements. If they are fearful that their customers might come and demand their cash, they hold onto their capital to ensure that it is available. If they are afraid that their borrowing customers will not be able to repay loans due to a weak economy, they also hold back on issuing new loans. The truth is that when economic forecasts are grim, conservative bankers become even more fearful than the rest of us.

The bottom line of this article is that confidence matters. So, the next time you hear Ben Bernanke give a speech, you can be confident that he is going to use language that makes you feel more secure. Whether you choose to believe those words is up to you.

Dr. Boyce Watkins is a Finance Professor at Syracuse University and author of “Financial Lovemaking 101: Merging Assets with Your Partner in Ways that Feel Good”. For more information, please visit http://boycewatikns.com/

Why I really hate Gift Certificates

My mother, who is one of the wisest people I know, was talking to me the other day about gift certificates. We were having this discussion while debating what to get our needy-ass, yet loveable relatives for Christmas (only a couple of them are needy, most of them are loveable). Christmas is that overly commercialized holiday that seems to come every single year. I don't mind Christmas, but it seems that the word "Christ" has been removed in exchange for the last part "must". "I MUST have this", "we MUST do that", it's crazy!

At any rate, we were wondering if gift certificates were the best gift to give, since it avoids the awkward, yet inevitable reality that you are going to always end up giving something to someone that they just bought, don't want or don't need as much as something else. So, you have then graced your loved one with the burden of yet another trip to the pawn shop or the 50 mile long Walmart return line right after the holidays are over. They are also burdened with the guilt of having to pretend that they like your gift, even though they really don't. You know, those fake, awkward smiles that make your face hurt and stomach turn.

We both concluded in our scientific analysis (My Mama and Me Labs, Inc.) that gift certificates were better than regular gifts, since you can get what you want.

But I had to put the brakes on our ground breaking analysis....I then said, "Well, based on that logic, it would seem that money is the best gift certificate, since you can not only get whatever you want, but you can use it at any store."

That led us to wonder: "What exactly do companies give us in return for exchanging a hard earned $50 dollars that can be used ANYWHERE for their pathetic, multicolored little piece of paper that can is also worth $50, but can only be used in ONE PLACE?"

Nothing.

The companies typically give us nothing in exchange for the purchase of a gift certificate. It would be one thing if they allowed us to purchase a $30 gift certificate for $25. That would make our decision to limit the stretch of our money at least partially worth while. But when you give them $30 dollars that can be spent anywhere, they give you back the same $30 dollars that can only be spent at one place.

That's not all they do to screw us for the holidays.

Companies also get over on the fact that many of us never use the gift certicates anyway! According to Needham, Mass.-based consulting-firm TowerGroup, over $5 billion dollars in unused gift certificates allow corporations to fill the stockings of their stock holders. And believe me, they aren't giving that money to charity.

So, my mother and I both came to the grim conclusion that gift certificates, from a financial standpoint, are not very good gifts. Cash is the best gift certificate there is. It's the thought that counts, and my mother and I put quite a bit of thought into our decision. We hope our relatives appreciate it.

So this year, everyone we love is going to get a card with cash in it. That's the same gift that makes every third grader smile (Remember when that old relative you never talked to sent you that ugly card every year that always had cash in it? Don't pretend like that WAS NOT the first card you opened!). Perhaps the third graders are onto something, since this gift can make adults smile even more.