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Guest Post: The Wealth Effect Shifts Into Reverse
Submitted by John Rubino via Dollar Collapse blog,
Stripped of all the acronyms and economist-speak, government policy of the past few years has been simple: lower interest rates to push people out of cash (which yields nothing) and into stocks and houses. And then, when those assets go up enough to make their owners feel rich, hope that this paper wealth translates into a willingness to max out credit cards and take out car loans.
This propensity to borrow and spend more when your investments are rising is called the wealth effect, and by early 2013 it seemed to many that America’s “normal” debt-driven consumer society was reviving and that we might, after all, be able to maintain our military empire, welfare state, big houses, SUVs, massive banker year-end bonuses, easy incumbent reelections, etc, etc, without any prioritization or hard choices.
Nope. It turns out that the laws of economics can be bent but not broken. You can’t have a vibrant, growing economy AND interest rates near zero AND a stable currency at the same time. One of these has to give. And in the past month interest rates have started moving back towards historically normal levels.
Rising interest rates are incompatible with housing and equity bubbles, and the air is now leaking from both. As this is written on the morning of June 20, global stock markets are down big. And US housing, which in some markets was approaching 2007-esque levels of speculation, has hit a wall, at least based on mortgage applications:
Mortgage applications tumble as rates rise further: MBA
(Reuters) – Interest rates on home mortgages rose last week to hit their highest level in over a year, sapping demand from potential homeowners, data from an industry group showed on Wednesday.
Rates climbed 2 basis points to average 4.17 in the week ended June 14, according to the Mortgage Bankers Association. It was the highest level since March of last year.
After hovering around record lows, rates have surged for six weeks in a row, pushed higher by worries that the Federal Reserve could slow its stimulus program sooner than had been expected. Rates have accelerated by 58 basis points since the start of May.
The Fed’s bond purchases have kept borrowing rates, including mortgages, low. Though mortgage rates remain low by historical standards, the ultra-cheap mortgages have helped lure buyers back into the market and worries have crept in that higher rates could disrupt the still-young housing recovery.
The rise in rates appeared to hold back homebuyers as MBA’s seasonally adjusted index of loan requests for home purchases – a leading indicator of home sales – fell 3 percent. The gauge of refinancing applications slipped 3.4 percent, though the refinance share of total mortgage activity held steady at 69 percent of applications. The overall index of mortgage application activity, which includes both refinancing and home purchase demand, declined 3.3 percent.
And so the wealth effect shifts into reverse. Fewer people can afford mortgages, so home prices stop rising, making homeowners feel less rich. Stock prices stop rising (or, like today, start going down) and the record number of people who have been buying on margin see their exciting gains melt away. They feel both less rich and suddenly very stupid. Most of them will spend less, and the recovery will stop in its tracks.
Which means it’s time to think about the next big announcement. A massive public works plan? Expanded QE? Maybe a major war? Whatever, it will have to be commensurate with the size of the now-global crisis. So, just a guess, but this time around it wouldn’t be surprising to see a coordinated attack on deflation from Europe, the US and China. In other words, global Abenomics.
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There was a news item about a year ago that a certain kenyan was recruitng (thru his 'campaign organization') shills to invade all sorts of blogs in order to change the subject of the posters or start phony arguments.
I have not noticed it so much here, but on some websites they seem to be effective.
If you are so desperate as to have paid shills trolling sites, you are obviously concerned your BS is not being bought, so you try to disrupt honest citizens' communications.
The Bad Guys are nervous; keep them that way.
Comedy and Monkeywrenches, Bit-Chez.
Instead of trolls, just call them who they really are--agents of the banks.
i was a sock puppet once...and she liked it :>)
Silenus, I'm so glad to see so many junks on your stupid post.
Violence is what provocateurs advocate, to drag out the misguided and mentally ill and so discredit worthwhile community efforts to advance peaceful progress.
We know this tactic of yours and reject it and reject you and the violence you advocate. Shame on you!
This accusation of "agent provocateur" is just an excuse for being impotent.
Yet, you used it against me above. Gah, you're a moron.
Yes, I used it ironically, to mean that most of the agent provocateurs that so many people are getting their panties in a twist about are nothing but the figments of frightened minds that want to believe there's a bogeyman around every corner, so that they can justify doing nothing against a corrupt regime. "Agent provocateur" is mostly an excuse for impotent whining, and those whiners deserve the label more than anyone else.
Give it up.
Agents provocateur, like terrists, come almost uniquely from Govt agencies and your tax dollars being misallocated with aims like creating violent confrontation in peaceful crowds, and confusing and dividing public sentiment within angry gatherings, thereby giving police and politicians a convenient pretext for violent crack-down. And they quickly realize they can turn it on or off like a faucet, to divide, radicalize and contain the populace. So Govts become institutionally addicted to implementing govt policy, via mob violence, created by Govt, and them blame it all on the 'radical' mob, to divide it to conquer.
Your tax dollars at work.
The government behaving in such a way sure educates the population though.
No, not likely. You came in here with your chest sticking out thinking you were hot shit. Sorry son, you aren't. You're barely worth the time spent replying to you, but I'm not replying for your benefit, I am replying to make it known that no one on here that is serious about any of these issues is advocating violence. Only children and imbeciles think that violence will solve this problem, because violence and warfare is what created this culture of immorality in the first place.
Did you think you were the first to come into here unprepared and spewing that nonsense? You have nothing new to offer, and your intellect is soft just like your fortitude.
Nothing you have said will work in even the slightest way that you think it will. You are a sheep posting on a site filled with wolves and dogs. You must have missed the notice in the byline of the header, and the theme of the site should have given it away what sort of crowd is here...
I recommend you shut up and start reading and listening more, because you are so low on the totem pole that you're on the part that is buried in the dirt. Your voice is like a screeching that does nothing but grate on the nerves of your betters. Get used to it, because that is the reality of the situation until you can get past your juvenile obsession with violence and behave like a civil and respectful human being.
+1 for the old ZH vets. Love you guys.
Here is where you give yourself away as an "unserious person":
"I am replying to make it known that no one on here that is serious about any of these issues is advocating violence."
Sorry, but it doesn't matter one little bit if you're "advocating" violence or not. Violence is coming at you 100 different ways. Violence is what you have. You may have convinced yourself through a lifetime of conditioning that it is not there, but that just makes you deluded, not correct.
That's the problem with pacifists. They're moral cowards. I could care less if they're conventional cowards, everyone's a coward, or else they've got a deathwish.
You are the battered spouse who doesn't fight back because it might get you beaten harder. You are the slave who doesn't raise a finger because it might get you whipped. You are the dog who doesn't bite because it might get you killed.
So many words you've wasted, all empty. Utterly vacuous. Meaningless.
I'll spell it out for you real simple. When you're surrounded on all sides by violent and homicidal sociopaths with plain intent to harm, maim, and/or kill, to "behave like a civil and respectful human being" is to sign your own death warrant, chamber the round, and point the barrel at your head. It is suicide.
You stand accused of moral cowardice in the face of evil. The words "tu ne cede malis" have no meaning for you.
Keep assuming I'm a pacificist while you come in front door at night. You will be as dead as any other guy with a shotgun making a mess of your face.
This fight will not be won if you give up the advantage you have, and that is them not knowing what you are willing to do. Fear is the most powerful weapon in the arsenal. Unless you thought the DHS was stockpiling all of that ammo because they think the public and the rest of us wolves are harmless.
I proudly stand and face any violence that comes my way. I will not seek it and bring suffering to others whose only foul was being near me though.
+1
This fight will not be won if you give up the advantage you have, and that is them not knowing what you are willing to do. -- NidStyles
>> This is a rigged system and we need to fight back with violent means.
Personally, I'd assume that anyone I encounter online who is advocating violence is on the fed's payroll.
Violence and fraud are their profession.
Listen carefully, you will hear the blackhawks coming.
who in the right mind could except a recovery, where consumer goods, services, energy prices and tax's shot up almost 30% in four years!?
being said howbout 1260-1280ish for the DOW?
I'm buying my diapers before the price goes up.
You can get Snuggies in basic camo as well as the woodland pattern on Amazon.
Nothing new is under the sun.
War, huh, uh, what is it good for?
About 20 points on the S&P.
Meanwhile in Japan things are not looking so good! Sorry Nikkei.
Now that I have many Yankee dollars I'm getting many ads for sweet young Chinese women. Good times.
Do they deliver?
In under 20 minutes
Vibrant, growing economy? Without a commensurate increase in overall debt, that last happened when color TV was a dream. These commentators ought to define "growth." If they say GDP, ignore them.
Agreed. GDP is little more than a measure of waste and ineffenciency.
"and the recovery will stop in its tracks."
You who type such things lose (lots of) credibility the instant you type such things.
"Which means it’s time to think about the next big announcement."
And you should start to recognize that though there may be "big announcements," it is clear that the "announcers" are out of fuel, and headroom too, and social forces will rule the day 'til either pigs fly, or the current rendition of leadership is replaced by those who simply give a damn.
We should stop being so flippant about it.
The Bernanke 'put' becomes the Bernanke 'punt'. But, that means he no longer has the ball . . .
I'm stacking...
...canned beans and canned salmon lasts forever.
As long as those aren't Fukushima Salmon
One fish, two fish,
Red fish, OH MY GOD WHAT THE FUCK IS THAT?
I'm not feeling it this time around folks. Though the 10 year's at 2.42%, it seems the mkts. are consolidating. Hope I'm wrong, but this may not be 2008 redux.
2.50....ok 2.60...3.25...oh.."fair value" for credit risk...4.95...how about now!
I'm buying the fucking dip. I figure we got at least one more opportunity to suck swill at the trough before the real big hit comes. The whole mantra has already changed to "in December". Plenty of room for a little more goodness, boys and girls.
winning!!! oh wait..what did you buy?
I tried explaing once to a bank coworkers that FIAT MONEY IS A PUMP. It Pumps VALUE (The stuff that gives money meaning) out of the wider economy into the hands of those closest to the source of its orgination. It's like pouring water into a jar oil. The oil rises to the top and flows out the vessel containing it. Looked at me like I was drunk.
I also work at a bank. In both my own bank as well as competing banks (all sizes), I have little doubt, or in some cases proof, that many, many senior executives have zero understanding of fractional reserve banking, how Fed injects money into system, etc. I've seen the "drunk" look as well. If they don't think you're crazy, they don't appreciate a spotlight on their ignorance.
As someone who has tried to actually research te"wealth effect, as bernanke see it, it is a mything. it's an example of cultural hegmoney where the wealthy make up a position that advances their own adgenda.
in the us, the bottm 80% of people own 7% of stocks, so rising asset prices do little or nothing. the lost incomes on nsavings,nand increased oil prices cause more damage to the economy. it is only the very wealthy that benefit.
this concept is a myth. It worked with housing, but once again a myth as people bought on margin with the equity in their house.
It's real nonsense, and if bernanke really beleives it, he is stupid. But he is actually a trog in service to the banker class. adopting any nonsense economic policy which benefit them.
he's an evil sociopath
it's called a Pyramid, and it's way way way older than the Bernank.
check out the back of the ONE DOLLAR FeRN for instance.
question i have is: what's beyond that mountain range in the background?
The back of your head... 30 years ago...
From PBS Newshour: 24th Sep 2010 (transcript)
--
--
And so it is.
Seems a bit dodgy for Bernanke to be saying he's all surprised.
Those 10 thousand people standing in line to BUY gold back about 2 weeks ago or so, remember?
They were selling, not buying.
When gold was 1900, all kinds of ads on the radio to buy gold before it rockets to 5,000. The rocket exploded but nobody paid any attention.
Hard to find buyers at 1290 today. I did see one buyer today buying 3 ozs of gold. A greater fool was born again.
Go to Boise and pan for gold on the Boise River, earn a days wage mining gold and finding a 1/2 oz or more each day.
I bought my silver at 6, 7, and 8, and won't sell at 50.
Oh, so you typically make 180k a year panning for gold? Cool.
lol, I wish I were mining for gold on the Boise River and hope to one day, but I've been there, but not done that.
Good reason to have a pack mule.
A half ounce times 360 days of mining is 180 ozees.
I suppose I'd let it go for a 1000 dollars per oz. Or, since it is all obtained basically for free, I can just hold and wait until the price increases another five hundred bucks.
Hold and sell, no buying involved.
BTFD markets are going to fly higher because out of all the FED banksters ability to control perception and to quell dissent the stock markets are the simplest to manipulate. Also the infrastructure is tested, in place and working. It is a given that the last part of the collapse will be the stock market. Until the big Boom buy low and sell high.
My wife, from China, in close touch with many there and Chinese to the core, called bullshit on that photo btw; says there is no way absent a major discount. There is just no 'stadium-size' gold buying going on over there...
Don't ruin a good story with facts!
Yeah, the Chinese hate gold. Much like the Indians, Russians and Arabs right?
What other kinds of bullshit you have to sell here Hongcha?
He will say it was photoshopped
The Nikkei is green! All is well!
Look, it was only a blip, all is well now. Dow up nearly 100 points and the S&P up over 12 points, what's the problem?
It was a buying opportunity /sarc
an ebbing tide sinks all boats!
seriously though, the fed ought to simply exchange letters with the Treasury and cancel its bond holdings of Treasuries, before its too late.
it can make the swap of government coupon bearing debt with a maturity date in exchange for zero coupon perpetual cash permanent, making it a win win for the tax payer and leave the cash in the global system.
Please pardon my ignorance, but what is "consumer confidence"? I mean, you get a wage, you spend it. You either have money or you don't. No confidence involved.
Okay, okay. So then you want more stuff so you borrow money. But only if you think you can pay it back. Either because you worked out you could afford it, or because your accountant said you could, and you don't think you're going to lose your job any time soon, or maybe you don't give a shit but the bank said you could borrow money and that's good enough for you ...
Is "consumer confidence" just code for the money you borrow? Because (either you or the bank is ... ) "Confident" that you can pay it back and you won't lose your job next week?
And wouldn't a higher income in the first place, that you'll spend no matter how "unconfident" you feel, be a shitload better than "consumer confidence"?
I've really got no idea here so please, someone, enlighten me. Thanks.
Edit: I "just fucking googled it" and now I feel a little bit smarter, but not much, so I still welcome any additional input.
... the spurs lost.
And the Oligarchy auto hyping of markets goes on :
http://www.boursorama.com/actualites/standard-poor-s-confirme-les-notes-...
There are two ways to deflate the world financial asset bubble that Reaganomics created and FED levitated :
1° voluntarily under statist 11th hour retrenchment from bubbleomania model and virtuous self imposed PAINFUL control; by huge tax increases on the rich and corporates; by reigning in the financialista scam to its very roots, by shutting down the tax Caymanista oligarchy cabal; by restructuring the TBTF and imposing transaction bank taxes; by prosecuting past financial crimes; by installing bail-ins to grease the banksta rehabilitation machine.
WHy? 'Cos the past 5 years post 2008 shows this runaway train WILL NOT autostabilise by NEW financial acumen and self imposed restraint. ON THE CONTRARY. We have severe material constraints now visible in the world, both energy wise and ecology wise and the current hyper consumerista model is kaput. These CB pumping guys, Oligarchy shills, in economic kick start of business as usual model, are heading to the wall; an additional challenge facing real world along with financial malinvestment/structural imbalance now systemic. Too many balls up in the air even for the Bilderberger best n brightest boys.
2° By continuing in denial; in oligarchy rampant flight to safe havens; by stubborn corruption of political institutions of first world and finally by thieves falling out and ending the shooting match either in Armageddon, as always, or in huge depression followed by ALWAYS....
That looks like the choice Pax Americana led globalisation has; all hocked to OLigarchs of the world.
For the first option to work, the world global Oligarchy has to realise they have no way out except to eat humble pie : sacrifice at least half their stashed equity along with the debt mountain it sits on.
Something that Oligarchs have never done based on past history. Lets see if the protracted multi generational doldrums scenario that is in the pipeline as the "soft landing of advanced economies and concomittant demise of middle class" is sellable to first world population; to reduce structural imbalances by flattening the differential between labour/productivity imbalance between North and SOuth hemispheres (or east vs west); something that is now basic economic DOGMA since globalisation began.
Just Figgered it out
Why Do all the Senators want open borders and 11 million new Americans?
Its the economy stupid
They think the new citizens will spend the money the gov gives tem
Will borrow to the hilt and the money will flow and the problem of deflation will be solved
Just like the post war baby boom
Sure there a inconsistancies:
Government hand outs is not capital and not capitalism
The current citzens have no vested interest in financing more gov spending, either through taxes, inflation or spending on wars and "programs"
But for our political leaders like Lindsey and Mccain there is the extra bonus -- the get to buy more votes albeit with the current citizens money
PS the current citizens just dont understand the inner workings of power
With the present average or median wage, it makes no sense to expect rising house prices or even a stabling of abilities to accept a mortgage.
The golden goose has died.
RTTB : +1000 for "... The golden goose has died."
Low wages + increased competition for jobs = no reason for real estate or stocks to rise. Increased immigration = more idiots to lend money to for more mortgages for more foreclosures for more assets for banksters to repossess or buy up in pennies to the dollar. "Rich get richer, poor get poorer" = where have I heard that before?
Errr, as poor get poorer, most of the rich also get poorer. 3 types of rich:
1. Those who get rich from having lots of poor customers.
2. Those who get rich from having a few rich customers. (Note some of those customers are type 1.)
3. TPTB - can get free money and guvmint bailouts.
"Which means it’s time to think about the next big announcement. A massive public works plan? Expanded QE? Maybe a major war? Whatever, it will have to be commensurate with the size of the now-global crisis. So, just a guess, but this time around it wouldn’t be surprising to see a coordinated attack on deflation from Europe, the US and China. In other words, global Abenomics."
Will we ever see such a thing? Abenomics is already shown to be a disaster, so why would anyone want to apply it on a global scale?
Haven't we already had global coordinated bank intervention? Didn't work, did it?
The routine is that everyone wants a cheaper currency to make their exports more popular. As Mish pointed out this morning, Brazil complained their currency was too strong, but are now, with protesters in the streets, intervening to support their currency. OOPS.
The manipulation doesn't work. Pumping up the stock market, leads to it crashing. Inflation leads to deflation. We are going to fight deflation by causing defllation. Now that is smart.
Alan Greenspan noted that it was 1920's FED policy that lead into the Great Depression. The boom causes the bust. Horse comes before cart. Greenspan doubled down on 1920's FEd policy and doubled down on the mess that was created.
On a reversion to the mean, the farther one extends from the mean, the greater the reversion needed to get back to the mean. Greenspan double leveraged the extension from the mean. So what is massive public works or massive QE or massive war going to do? Add to the existing problem, not subtract from it.
It is past time to stop digging a deeper hole.