Category: Video

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “Will There Be A Wealth Effect? (Video)”

  1. ZackAttack says:

    Just a non-economist asking here…

    Is there any credible empirical evidence that altering inflation expectations actually leads people to spend? Are there any actual studies demonstrating the existence of a “wealth effect”?

    If all this is just academic belief and conjecture, they would seem to be embarking on the most massive social engineering experiment in human history on a very questionable basis. In the absence of evidence, one could just as plausibly argue that increasing public inflation expectations would lead them to save *more* to cover the gap. Also, with the average 401K containing only $8,000 and inaccessible until age 59 – 62, it would be completely irrational for someone to believe they are actually any wealthier as a result of rising asset prices.

  2. Winston says:

    To ZackAttack re: “Is there any credible empirical evidence that altering inflation expectations actually leads people to spend? Are there any actual studies demonstrating the existence of a “wealth effect”?”

    I have not heard any studies/empiricism about changing inflation expectations in the nine years that I have been immersed in economics. Honestly, most (and I mean most) people do not think about inflation-inducing actions from The Fed at all. We who move in these circles are initiated in these issues more than anyone we greet everyday, maybe much more than either our spouse or significant other.

    To conclude: The Fed’s words and actions mean something to you and me but not so much to the 70% representation of the GDP equation. That is one reason that I argue that Bernanke is a failure of a Chairman. Betting $2.3 Trillion on the credit markets is not a courageous move. That is especially the case when the banks refuse to cooperate with Bernanke’s expectations to lend but, instead, buy T-notes.

    This extensive disconnect from basic crowd psychology evidences policies that are incubated inside a closed system with unrealistic expectations.

  3. boveri says:

    Of course there will be a positive economic wealth effect and it will be commensurate with the rise in the S&P. Its always worked that way.

  4. BuffaloBill says:

    See Jeremy Grantham;s 3rd letter at:

    http://www.gmo.com/websitecontent/JGLetter_NightofLivingFed_3Q10.pdf

    He discusses this subject in some depth.

  5. Winston says:

    Great paper BuffaloBill. That’s a keeper.

    I stand by my original assertion: people will not pay any attention to The Fed’s manipulation of interest rates if they see no real value created in personal equity. A lower mortgage payment might feel better – but that really is splitting hairs when one considers how this will affect people with a 30-year ARM. It is just daft to assert that people will go out and spend because they feel wealthier for the simple reason that their investment portfolio has risen in value. Investment portfolios are a mixed bag, as Bianco says, with some gains being offset by losses.

    Also consider that if wealth is to be extracted from one’s home -as was so popular during the go-go years- then try refinancing the home with easy terms at your bank. If one’s bank is like so many other smaller and regional banks, they probably are not so accommodating as they were in 2006.

    This is a boondoggle of a plan that looks, feels and smells like all other Fed plans before it: just another scheme to re-inflate the RE bubble. No substance at all.

  6. ZackAttack says:

    The ironic thing is that QE has so far served to reflate everything *except* home prices and wages.

    In an environment of 10% UE and falling wages, for the majority of us, there is no concept of risk capital.