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Strategies & Market Trends : Coming Financial Collapse Moderated -- Ignore unavailable to you. Want to Upgrade?

To: EL KABONG!!! who wrote (600)	9/2/2001 2:02:20 PM
From: EL KABONG!!!	Read Replies (1) \| Respond to of 974

biz.yahoo.com Friday August 31, 12:30 pm Eastern Time Greenspan-Capital gains key influence on economy (UPDATE: Adds analyst reaction, background, paragraphs 5-9) By Glenn Somerville JACKSON HOLE, Wyo., Aug 31 (Reuters) - Federal Reserve Chairman Alan Greenspan said on Friday capital gains from stocks and homes will have a powerful influence on the U.S. economy's performance but that current measures of that impact are inadequate. ``The influence of capital gains on economic behavior...is likely to be of substantial consequence for the prospective performance of the economy,'' Greenspan said at a top-level meeting of central bankers and academics in Wyoming. The so-called ``wealth effect'' has been a hot topic of debate in recent years -- both during the massive run-up in equity values in the late 1990s and early 2000 and amid the steep downturn that ensued. Greenspan's speech, his first formal address since he discussed the state of the U.S. economy before lawmakers in July, marked the first time a Fed official has explained the central bank's bid to get a better handle on the impact of wealth on spending. Economists said the speech did not shed any light on Greenspan's leanings for future interest rate policy. Financial markets took the same view, shrugging off the comments by the powerful Fed chief. However, economists added that Greenspan's speech suggested that the wealth effect, and especially the importance of housing wealth versus stock market wealth, is a topic the Fed is struggling to understand. ``It's a speech that only an economist can love,'' FleetBoston Financial Chief Economist Wayne Ayers said. ``I don't think there are any immediate policy implications,'' he said, but ``these speeches are always interesting because you can tell what the Fed board staff is up to. And what they're up to, of course, is what Greenspan is interested in, proving this is one of the top items on his list.'' The Fed has cut interest rates seven times this year by a total of 3.0 percentage points to keep the U.S. economy out of a recession. The key Fed funds rate, which influences borrowing costs across the economy, now stands at 3.5 percent, its lowest level in more than seven years. U.S. central bankers next meet to discuss interest rates on Oct. 2. ``SHEER SIZE'' In his speech, Greenspan said ``the massive increase in capital values over the past five years'' has had a profound impact on incomes but that it was hard to separate the impact of gains from different sources. He noted capital gains on stocks and mutual funds in recent years have been two to four times the size of gains from home sales. ``The sheer size of such gains suggests that capital gains on equities have been a more potent factor in determining spending than gains on homes,'' the Fed chief told attendees at the Federal Reserve Bank of Kansas City's annual economic symposium. Greenspan said the U.S. central bank was interested in developing a clearer picture of how spending is affected by gains from different sources. ``For example, over the past year and a half, home values have appreciated, whereas equity prices have contracted significantly,'' he said. ``In such circumstances, differences in the propensities to consume out of the capital gains and losses on different types of assets could have significant implications for aggregate demand.'' The Fed is in the process of developing a method to help it gauge propensities to spend out of capital gains from different classes of assets, Greenspan said. He added that household wealth appears to explain about one-fifth of total consumer spending, which fuels two-thirds of the U.S. economy. Greenspan noted that the relationship of wealth to household incomes was not stable over the time periods that the Fed used for setting interest rate policy, which made it important to try to gain a better understanding of the relationship between the two. Greenspan said current government accounting methods were not sufficient to help sort out the impact of capital gains on spending. He said the saving rate gauge in the national accounts ``presents an incomplete picture of the financial state of the household sector in the aggregate'' so that new methods are needed to gauge wealth and income impacts on the economy. The Commerce Department reported on Thursday the U.S. personal saving rate, which measures savings as a percentage of after-tax income, jumped to 2.5 percent in July as tax cuts and rebate checks boosted disposable income by 1.7 percent, following a much smaller 0.3 percent gain in June. In June, the U.S. personal saving rate was 1.0 percent. The saving rate in July was at its highest level since June 1999 when it stood at 2.6 percent, the government said. KJC