The Wealth Effect Essay -- Wealth Effect Stock Market Economy Essays

The riches EffectThe Wealth Effect refers to the propensity of bulk to spend more than(prenominal) if they have more assets. The premise is that when the nurse of equities rises so does our wealth and disposable income, thus we feel more comfortable about consumption.The wealth effect has helped power the US economic system 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 bulk are investing furthermore the Federal Reserve has very little direct control over broth prices. The numbers are staggering. Since the end of 1995, home base 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 spendi ng 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 todays 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 be by laying off workers and scaling back investment. Second, the recent correction has put m any 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 gamble premiums, which boosts th e 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 affright investors so much, that the availability of finance is reduced. Since the... ...bear market if we remain at war for a longsighted time in the future. We have seen in the past month, sozzled 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 90s. Sources1.)Balke, Nathan. The Economy in proceeding. Federal Reserve Bank of Da llas.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.