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That the year 2009 has had more than its share of disappointing economic developments would not be front-page news (or even top-of-the-web-site news).But the return of the 'wealth effect'? That's almost stop-the-presses stuff: former U.S. Federal Reserve Chairman Alan Greenspan said 2009's bull market in stocks is reducing the need for additional stimulus actions, Bloomberg News reported Thursday.
Aided by U..S. stock market gains, U.S. household net worth increased by $2.7 trillion in Q3 to $53.4 trillion, according to data compiled by the U.S. Federal Reserve.
When portfolio values rise due to stock, bond, or other asset gains, it increases wealth and its impact on economic activity, called the 'wealth effect.'
"The stimulus is only a third spent, and its order of magnitude is not large enough to compare with the strength and power of the remarkable global equity increase that's occurred since early March," Greenspan told Bloomberg News Wednesday. "Capital gains have proved a far greater stimulus than one can attribute to the $787 billion program that has been only partially spent." Greenspan added that increasing spending beyond fiscal/monetary funds committed to-date may not be not needed because higher stock prices and earnings increases will make loans easier to access.
Economic Analysis: Another positive development for the U.S. economy. The subject of wealth and its relationship to income is a topic that's been worthy of many books, dissertations, and treatises, but briefly, here: perhaps the most important impact of the increased wealth is the enhanced capital position of banks, and the resulting improvement to their balance sheets. Hopefully, it will prompt more lending to small/medium sized businesses who need the capital to expand operations.
The wealth effect is also positively correlated with consumer spending: provided those who increase their spending are in a sound financial position to do so, the impact of the likely boost in consumption will represent another tailwind for the U.S. economy.
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Reader Comments (Page 1 of 1)
12-17-2009 @ 5:56PM
Gary E. Sattler said...
Joseph, I'm usually right with you in regard to what you post, but this piece, or Greenspan's part in it, is seriously kittywumpus.
If the equity increase mentioned here was not occurring on the heels of the single greatest world equity loss in modern history, then Greenspan might be onto something.
However, we are still faced with double digit unemployment, domestic manufacturing capacity which is still around 30% idle, home values which are still in a much needed correction phase, government budgets which are crumbling, and other seriously negative economic situations.
In a healthy economic scenario, real equity is built over years of consistently robust output and growth. That is a markedly different animal than this speculation fueled paper dragon which Greenspan is pointing to and declaring as healthy recovery.
I think Greenspan is premature when attempting to tell us that market conditions are signaling that we're in the clear.
12-17-2009 @ 9:11PM
william lindblad said...
I think that we should all remember one thing - the three musketeers of Greenspan, Runbin and Summers are why we are in this messy economic predicament. Given that, I would not put to much credence into anything that Allan has to say, nor can I understand why Summers is still in an instrumental government position. Granted, people are human and err in judgment, but on the same note, Mullholland did not build a new dam after the St. Andrews broke. Simply put, I think that Allan's views are somewhat dubious, as he still gets paid quite well for his opinion. Sir Harold Evans put it quite well with his opinions are worthless without solid fact. Obviously, we are just going to have to "wait and see", but there are numerous contrary facts. Personally, I think that all of the three aforementioned should simply fade into obscurity - there are enough problems and false hopes do not improve the issue.