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Pastimes : The Naked Truth - Big Kahuna a Myth
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To: TheStockFairy who wrote (59318)8/30/1999 2:27:00 PM
From: pater tenebrarum  Read Replies (1) of 86076
 
Let me put it this way: the wealth effect is real, but hard to quantify. apparently individuals have been overly willing to take on debt and spend like there's no to-morrow due to their gains in the stock market. the overstatement of earnings is a result of the bull market.
corporations do go into debt due to the wealth effect, as the main feature of the wealth effect is strong consumer demand, which leads to strong capital investment. since corporations must finance both capital investment and stock buy-backs, they go ever deeper into debt.
misallocation of funds is also an indirect result of the wealth effect - as people get richer on paper, they tend to care less how money gets invested. the real estate bubble that follows on the heels of the stock market bubble has created quite a few pockets of malinvestment, like the tendency to raze mansions and erect even bigger mansions in their stead and the pervasive urge to build scores of sports stadiums and hotels.
none of this would be happening if not for the credit and asset bubble.
as mentioned above, i admit that the actual extent of the wealth effect is hard to measure - but if not for the wealth effect, how do you explain the negative savings rate and the extremes in household and corporate debt? the exploding current account deficit proves that the nation is living beyond it's means...and it's most likely a side-effect of the wealth effect.
but there's no need to argue the point - we'll find out how important the wealth effect is/was once the bubble bursts...
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