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Pink Hunting Boots . . . Seriously?

14249934_sThis past weekend, my oldest daughter and I drove to Vermont to see my friend Paul for the opening of deer season. I am not really that much of a hunter. In fact, I often think that the deer are smarter than me. Nevertheless, I enjoyed the time away with my daughter. No cellphones or computers, just Maeve and me, in a tree stand, in 18-degree weather, together looking for Bambi.
 
Maeve can be relentless when she wants something. She kept telling me on our four-hour ride that her boots are not warm enough, that they are too small, that they did not work last year, and therefore, she was miserable, her feet hurt, and . . . that she needs cool pink hunting boots. I heard this over and over again as she tried to convince me that I should buy her $125 pink hunting boots that she saw online at Bass Pro Shops. I did not argue that she needed boots, but the brown ones for $50, I argued, would be just fine.
 
Now, before I tell you what I did, let me build my case here.
 
Most mainstream economic assumptions and theories are based on what is called Rational Choice Theory (RCT). Investopedia defines RCT as, “an economic principle that assumes that individuals always make prudent and logical decisions that provide them with the greatest benefit or satisfaction and that are in their highest self-interest.” In other words, RCT assumes that people make rational decisions.
 
Hmm . . . let’s think about this.
 
How about CDs? You give money to a bank for a set period of time and the bank pays you interest on your money. Sounds like a great idea, right? But last time I checked, CDs are earning virtually nothing. CD owners are actually losing purchasing power because the interest earned on CDs is not keeping up with inflation.
 
So, if that is the case, and the Rational Choice Theory is accurate, all CD owners would cash in those CDs and “invest” their money in goods and services. But many are not doing that, are they? Why not? Well, truth be told, we really are an irrational species.
 
People do stupid things all the time, like putting money in CDs. Or how about those investors who are now chasing market returns at the height of the market, without having an exit strategy to avoid the next significant market correction?
 
. . . or buying those $125 pink hunting boots . . . yes, that is what I did.
 
To understand our economy and how it behaves, we must understand what motivates people. What motivates a person to spend $500 on an iPad? What causes a person to buy a bigger house, taking on a bigger mortgage and going into more debt? What motivates a father to buy his daughter $125 hunting boots?
 
The question we must ask ourselves is, “What motivates us to make irrational decisions?” For most of us, it is our kids. Our kids make us do stupid things. Kids drive us to make irrational decisions and these decisions influence how we spend our dough.
 
My point here is that consumer spending represents about 70 percent of our Gross Domestic Product. In other words, consumer spending is the largest influence on our economic health and each generation’s spending patterns, for the most part, are predictable. For example, from studying spending patterns, we know that families will spend the most amount of money between the ages of 42 and 57. For the majority of the population, those are the years that, well, kids are just downright expensive with sports, high school, college, $125 pink hunting boots and for me, weddings (I have three girls). Heck, I actually know how old we are when we purchase the most potato chips, age 42, just when our kids are steaming through their teens.
 
So, if the largest demographic in our economy is in their peak spending years, our economy grows. By the same token, when demographics shift and that same group passes its peak spending years, guess what, our economy slows.
This brings me to my next point: the largest demographic now being flushed through the financial system is the Baby Boomers. Their kids are out of the house so they are past the time in their lives where their kids drive them to make irrational decisions. (At this point, their kids are probably starting their own families, so they will now begin to make irrational decisions for themselves.)
 
As a result, the Boomers are not spending. They are saving. And the next generation, Generation Xers, is significantly smaller than the Boomers, so they do not have as great an influence on our economy. This demographic shift naturally slows our economy.
 
So, why is this important to you, Cutter Family Finance readers? If decades and decades of data are correct, do not expect consumer spending to pick up anytime soon, no matter how hard the Fed tries to manipulate the economy and our markets, or how much they say we are in a recovery.
 
In times like these we must be suspect of the markets. As we saw in October, they are propped up by the Fed printing. There is no lasting, dynamic economic recovery driven by consumer spending. That will not happen until the next demographic shift, which is not going to happen anytime soon.
 
Be vigilant and stay alert, because you deserve more.