The Wealth Effect
The "Wealth Effect" refers to the propensity of people to spend more if they have more assets. The premise is that when the value of equities rises so does our wealth and disposable income, thus we feel more comfortable about spending.
The wealth effect has helped power the US economy over 1999 and part of 2000, but what happens to the economy if the market tanks? The Federal Reserve has reported that for every $1 billion in increase in the value of equities, Americans will spend an additional $40 million a year. The wealth effect has become a growing concern because more and more people are investing; furthermore the Federal Reserve has very little direct control over stock prices. The numbers are staggering. Since the end of 1995, household stock holdings have doubled to more than $12 trillion dollars. And, for the first time, equities are the most valuable asset of the typical American household, not the home. When it comes to spending money, consumers take all their financial resources into consideration, from their income to their home. When an asset surges in value for a sustained period of time, such as the stock market in the 1990s, people feel flush and are willing to spend some additional money, perhaps by buying a fancy car or by taking a more expensive vacation. A good number of Wall Street analysts blame the wealth effect for today's negative savings rate.
Declining stock prices affect firms in several ways. First, lower stock prices, especially induced by profit warnings, increase shareholder pressure on managers to cut costs by laying off workers and scaling back investment. Second, the recent correction has put many stock options underwater, and it is unclear to what extent workers will bargain for more cash in place of options and how this might affect payroll costs and inflation. Third, the factors dragging down stock prices typically spur investors to demand higher risk premiums, which boosts the cost of financing business investment. This takes the form of increased spreads of corporate bond and commercial paper interest rates relative to Treasury yields and lower prices for any new stock that any firm dares to offer. Aside from raising the going price of new finance, the increased uncertainty associated with lower stock prices can spook investors so much, that the availability of finance is reduced. Since the...
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...bear market if we remain at war for a long time in the future.
We have seen in the past month, steady gains in the major stock indices. Some are stating that the bull market may be back with the war on terrorism going well, and others are insisting that the gains are only short term and that the market will retest the lows hit in mid-September. Only time will tell on how long it will take for our market to completely rebound into a bull market like we saw in the 90’s.
Sources
1.) Balke, Nathan. “The Economy in Action”. Federal Reserve Bank of Dallas.
2.) Angeletos, George , David Laibson, Andrea Repetto, Jeremy Tobacman, and Stephen Weinberg. The Hyperbolic Buffer Stock Model. 3 March 2001.
3.) Clarke, Grahm and Steven Caldwell. “Wealth in America”. Ohio State 1998.
4.) Fidelity Investments. 2001 Estimated Stock Wealth Effects on Consumption.
5.) American Express Company. 2001 American Express “ever day spending” survey.
6.) John Khoury. Yahoo Finance: http://finance.yahoo.com.
7.) U.S. Census Bureau. www.census.gov/. 2001.
8.) Swanson, KC. Is the “negative wealth” effect all its cracked up to be. The Street.com 29 March 2001.
Sklar, Holly. “The Growing Gulf Between the Rich and the Rest of Us”. They Say I Say. Gerald Graff, Cathy Birkenstein, Russel Durst. New York: W. W. Norton & Company, 2009. Print.
This paper aims to discuss the Short-Term and Long-Term Impacts of the Great Recession and
Lynch, David J. - "The 'Standard'" How Inequality Hurts the Economy. Bloomberg Business Week. Bloomberg, 16 Nov. 2011. Web. The Web.
Gwartney, James D., Stroup, Richard L., Lee, Dwight R., Ferrarini, Tawni H. 2010. Common Sense Economics: What Everyone Should Know About Wealth and Prosperity. New York: St. Martin’s Press.
October 29th, 1929 marked the beginning of the Great Depression, a depression that forever changed the United States of America. The Stock Market collapse was unavoidable considering the lavish life style of the 1920’s. Some of the ominous signs leading up to the crash was that there was a high unemployment rate, automobile sales were down, and many farms were failing. Consumerism played a key role in the Stock Market Crash of 1929 because Americans speculated on the stocks hoping they would grow in their favor. They would invest in these stocks at a low rate which gave them a false sense of wealth causing them to invest in even more stocks at the same low rate. When they purchased these stocks at this low rate they never made enough money to pay it all back, therefore contributing to the crash of 1929. Also contributing to the crash was the over production of consumer goods. When companies began to mass produce goods they did not not need as many workers so they fired them. Even though there was an abundance of goods mass produced and at a cheap price because of that, so many people now had no jobs so the goods were not being purchased. Even though, from 1920 to 1929, consumerism and overproduction partially caused the Great Depression, the unequal distribution of wealth and income was the most significant catalyst.
Smith, Noah. “How to Fix America's Wealth Inequality: Teach Americans to Be Cheap.” The Atlantic. Atlantic Pub., 12 March 2013. Web. 06 April 2014. .
Reich, Robert. "Why the Rich Are Getting Richer and the Poor Poorer." Mountain View College Reader. Neuleib, Janice. Cain S., Kathleen. Ruffus, Stephen. Boston: 501 Boylston Street, Suite 900. 2013 Print.
In the October 10, 2011 issue of Time, there is a feature called “The Great American Divide” that reports on money: who has it, who is spending it on what, and how as a country Americans feel about it. This feature also reports something troubling, how the gap between rich and poor is once again growing wide (Sachs, 2011). Shifts in spending, shifts in money control, and a struggle with how to deal with the great money crisis America and Europe face are all discussed in this feature. This feature pulls together how GDP, unemployment rates, consumer consumption, and pricing affect this era of volatility and the shrinking middle class (Foroohar, 2011). This feature also reflects on inflation, economic growth, political stability in emerging markets and taxes play in as well. The answer to solving this imbalance of wealth and the struggling economy may be found by government action, but will it be too late?
Reich, Robert B. “Why the Rich Are Getting Richer and the Poor, Poorer.” A World of Ideas:
In October 1929, the United States stock market crashed due to panic selling. This crash started a rippling effect that contributed to a worldwide economic crisis called the Great Depression. This crash was such a shock because of the economic expansion of the 1920’s when the Dow Jones average reached an all-time high of three hundred eighty one. The year 1928 was a time of optimism and the stock market had become a place where everyday people truly believed that they could become rich. People everywhere were talking about the market and newspapers were reporting stories of ordinary people such as chauffeurs, maids, and teachers making millions off the stock market.
Education is a major component in an individual’s future success in today’s society. The traditional model that we are taught to follow is to achieve good grades in High School so that we are able to get accepted to a good college in order to obtain a good high paying job. However, if the major building blocks of our education are somehow hindered by sociological influences, it would be correct to assume that our future success would also be affected. An example of a situation in which sociological aspects impact that education system can be found right here in the city of Lowell. According to the United States Census Bureau, the median household income for the year 2012 was about $51,714 annually compared with the average income throughout Massachusetts which was about $66,658 annually. Additionally in the year 2012, the statistics for the persons below the poverty level was 17.3 percent, significantly higher than Massachusetts average of 11.0 percent. Lowell is known as an urban environment and a city full of many different and diverse types of people. However, the city of Lowell does contain a large population that are, by today’s standards, considered to be living below the poverty line. ("U.S Census Bureau")
In turn everything in the present and the future is judged through the stocks as they hold a high importance in industrialized economies showing the healthiness of said countries economy. As investing discourages consumer spending over all decreases, it lead...
What is the role of investor’s confidence in the financial markets? Why a downgrade of the US treasury sends ripples in the stock markets all over the world .How do investors react to such kind of information? Do we take all the information into account before...
Wealth inequality is the gap that exists between rich people and poor people because the inequality of assets that people own in America. Wealth inequality will always exist in the society. Wealth means what a person owns like land, properties, and money without considering the debts. Some societies have a bigger gap of wealth than others. Maybe sometime in the paleolithic era there was not wealth inequality, because they had a nomad style of live and they only hunted and recollected their food. In this period of time, the concept of private property did not exist and everybody share the goods. Since the beginning of human civilization wealth inequality exist; kings were the owners of everything while the slaves did not own anything. With the past of the years the gap between the wealthy people and the poor people suffered changes like the great depression of 1930 and the last recession of 2007. The wealthy gap will always exist; however, the ideal gap must be as fair as possible.
In the world today there is a lot of poverty. There is a great divide