| The
Wealth Effect |
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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. |
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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. |
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Dictionary
