The “wealth effect” and stimulus

U.$. net wealth actually declined in 2008, by 17.9%.(1)

 

“Americans’ net worth plunged a record 17.9% in 2008 as the value of their homes, stocks and other assets dropped swiftly, the Federal Reserve said Thursday in a report that did not bode well for consumer spending and the overall economy this year.

“With net worth dropping so much, consumers are likely to focus on saving, not spending, as they realize they can’t rely on their homes and stock portfolios as ever-rising sources of income, says RDQ Economics senior economist Conrad DeQuadros.”

 

This is a concrete demonstration of the “wealth effect” on GNP, a controversial theory if taken in isolation at this time.

If the U.$. economy actually ran a surplus without the dollar bubble, if the government budget were in surplus and if the interest rate were as it is now, there would be little debate about what the united $tates would do.

When the stock market is flattened with cash on the sidelines, “borrow-and-spend” becomes attractive. In this situation, if there is a wealth effect(2) it will offset the stimulus spending to some degree. Some might settle the argument over a number such as the “propensity to consume” of rich and poor. If consumption is down, and wealth is down, nonetheless, government borrowing of the sidelined money to give to consumers may be more stimulating than leaving it in the stock market as savings of the rich. Profits might rise from the stimulus and boost the stock market later.

The Democrats would typically duke that question out with Republicans. At the moment, the Keynesian wing of Democrats has the upper hand. However, MIM is more concerned about international aspects and we suspect but won’t aerate that the wealth effect will be confounded with something else at this time.

It would seem that borrowing money abroad instead of home has more instant bang-for-the-buck when it is for 10 years at about 3%. Borrowing the money from U.$. rich to give to less-rich people is just shuffling it from wealth to consumption, because as MIM has pointed out many times, there is no net surplus from U.$. workers. The borrowing from Amerikans might decrease the spending of rich Amerikans on consumption, but probably just not as much as the increased consumption of the less-rich given government jobs.

What we are really interested in is why the national bourgeoisie wants to loan this money to stimulate the U.$. economy when it can stimulate other economies.

On another question, economists give Obama a 59% positive rating.(3)  I wondered if there is no economist economists would give that high a rating to, but they give a 71% grade to Bernanke.

Notes:

1. http://www.usatoday.com/money/economy/2009-03-12-net-worth_N.htm

2. http://en.wikipedia.org/wiki/Wealth_effect

3. http://www.foxnews.com/politics/first100days/2009/03/11/obama-geithner-receive-failing-grades-latest-survey/

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