Effect on 10 year financial asset prices of dumb monetarist Democrat people directing their dumb monetarist central bank people to increase the risk free policy rate to “fight inflation!” due to the goading of dumb monetarist GOP people whereby the US 10-yr this year goes from 1.6% in January to now 3.7% yesterday:
1.6%
3.7%
Same financial asset, price falls from 853 to 695 or about a 18.5% reduction… simply due to an adjustment in govt interest rate policy no “inflation!” fairy responsible or wtf these deranged monetarist morons brains can conjure up for them…
This policy adjustment has a similar effect on all financial assets stocks, bonds, CRE, annuities, etc… so here we are…
This policy adjustment has a similar effect on all financial assets stocks, bonds, CRE, annuities, etc… so here we are…
ReplyDeleteThat's the Fed's goal. Drive down the value of assets to get a negative wealth effect on consumption. For stocks, the wealth effect is about 4 cents on the dollar on the upside and about double that at about 8 cents on the dollar on the downside. Less consumption means less inflation.
However, according to David Backus the wealth effect is not observable in economic data, at least in regard to increases or decreases in home or stock equity. For example, while the stock market boom in the late 1990s (caused by the dot-com bubble) increased the wealth of Americans, it did not produce a significant change in consumption, and after the crash, consumption did not decrease.
Economist Dean Baker disagrees and says that “housing wealth effect” is well-known and is a standard part of economic theory and modeling, and that economists expect households to consume based on their wealth. He cites approvingly research done by Carroll and Zhou that estimates that households increase their annual consumption by 6 cents for every additional dollar of home equity. —Wikipedia
I would assume the wealth effect is also asymmetric for housing, which in this case would be 12% on the downside assuming the same doubling.
Wealth effect
This is what they do…
ReplyDeleteThere is no wealth effect in the aggregate from a simple price change in financial assets. The only thing that changes is the composition and distribution of financial assets in the economy. There's not even a psychological wealth effect. Some people may feel wealthier, while others feel poorer.
ReplyDeleteNice little widget, but it changes nothing. So, asset prices held by one cohort goes down, while asset prices held by another cohort (savers/creditors) goes up. (Income gains.) Big deal. The "swimming pool" still has the same amount of water. It just got swished around.
ReplyDeleteAnd the non-government (of the U.S.) is a net creditor, so it's an overall positive.
ReplyDeleteIf you own a house right now you feel rich. If you don't own a house, you feel poor, and are paying a fortune in rent with little or no security. So, where's the wealth effect? There is none.
ReplyDeletere: Home ATMs
ReplyDeleteThere is no wealth effect in the aggregate from a simple price change in financial assets.
The housing bubble that preceded the 2008 recession was an example of a positive wealth effect writ large.
A reader (ht SV) asked an interesting question: What killed the Home ATM in 2006?
First, the “Home ATM” is a joking reference to mortgage equity withdrawal (MEW), where homeowners extract equity from their homes - like a cash-out refinance or with a Home Equity Line of Credit (HELOC).
Here in Canada too, we had another housing bubble, which is currently deflating, due to the BOC raising rates. From an older article:
The number of households that have taken a home equity line of credit (HELOC) on top of their mortgage has soared nearly 40 percent since 2011, the Financial Consumer Agency of Canada said in a report that stoked concerns about consumer debt linked to Canada’s slowing housing market.
If you don't own a house, you feel poor, and are paying a fortune in rent with little or no security.
ReplyDeleteThe wealth effect, or lack thereof, is not relevant here. These people have no discretionary income, so their spending doesn't fluctuate. Okay, they have a little bit of discretionary income. This is from a 2012 article in the Atlantic:
Very Sad Graph: How Much Americans Have Left to Spend After Essentials, Today
After these categories, the poorest group has spent 98% of their income, leaving them with $367 for the year -- or a dollar per day.