#wealth effect

[sbeniwal6]

What are the Effects of Debt Financing ?

What are the Effects of Debt Financing ?

What are the Effects of Debt Financing ?

Mainly there are two effects –

(a) Crowding Out Effect of Debt Financing

(b) Wealth Effect of Debt Financing

(a) Crowding Out Effect of Debt Financing –

In economics, crowding out effect states that rising government spending drives down or even eliminates the private sector spending.

Debt financed government expenditure is largely offset…

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[ajourneythroughtime]

For the average person trying to decide how to feel about the economy, the single biggest data point is the stock market. When share prices are rising, the implicit message is that finance professionals — who, after all, dedicate their lives to understanding such things and should therefore know what’s happening — have decided that life is good and getting better. So the rest of us relax and go shopping. Known as the “wealth effect,” this tendency of asset prices to affect consumer behavior is now a key policy goal of the US and pretty much every other major government. But what if it’s all a gigantic, multi-trillion-dollar con? That’s the conclusion a growing number of analysts are reaching as they dig into the reality behind the recent record highs in US equity prices.

[mandrocles]

Debt vs. assets vs. valuation

A standard argument why most "mainstream" Economics treats the level of debt in an economy as irrelevant is that debt is collateralized by assets, so if debtors fail to pay their debts there is just a transfer of wealth between debtors and creditors, and overall there is no change. So for example each debt is collateralized by an IOU, or by a separate asset, and if it is collateralized by an an IOU in effect a failure to pay the debt is the same as a transfer of the IOU from the creditor to the debtor, or if the debt is collateralized by another asset, a transfer of that asset from the debtor to the creditor.

That is both precisely right and entirely ridiculous, because debts are not collateralized by assets but by the valuation (in the sense of sale price) of assets, and while debts are written for a fixed valuation, the valuation of assets can be very variable.

So the IOU of someone that cannot pay the related debt has a valuation which is a fraction of its face value, and the property that collateralizes a mortgage can acquire a valuation that is a fraction of the face value of the mortgage. Even worse, the repayments on a loan stop often at the time where the valuation of its collateral is low.

Therefore the inability to repay debts does not merely transfer wealth, but it can also destroy wealth, in the sense that the reduced valuation of an asset reduces its purchasing power. Therefore balance sheet issues do matter to macroeconomic insights, ultimately because newly issued debt is in effect newly issued purchasing power in almost every situation, not a transfer of purchasing power.

[infoterrorism]

What the Fed Hasn’t Fixed (and Actually Made Worse)

http://www.maxkeiser.com/2016/08/what-the-fed-hasnt-fixed-and-actually-made-worse/?utm_source=dlvr.it&utm_medium=tumblr

[infoterrorism]

Here’s Why Housing Must be Propped Up

http://dlvr.it/CSkCJS

[washingtonsblog]

Here's Why Housing Must be Propped Up

Here’s Why Housing Must be Propped Up

The Powers That Be have gone to extraordinary lengths to prop up housing by whatever means are necessary since the collapse of the housing bubble in 2008: the Federal Reserve has pushed mortgages rates down by buying mortgage-backed securities, the federal housing agencies (FHA, VA) have issued millions of low-down payment loans, and the federal government has essentially taken over the mortgage…

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[investir-en-bourse]

Qu’est-ce que le « wealth effect » ? - Regardez :

Nouvel Article - Cliquez ici : http://www.en-bourse.fr/quest-ce-wealth-effect/

Qu’est-ce que le « wealth effect » ?

Le « wealth effect », ou effet de richesse en français (également couramment appelé « effet Pigou », du nom de son auteur), est une théorie économique selon laquelle la consommation des ménages augmente, lorsque leur patrimoine (financier, ou immobilier), augmente. Sur quoi s’appuie cette théori...

[publicsq]

Household net worth increased $21.5T from $55.7T in the first quarter of 2009 to $77.3T in the third quarter of 2013. $2.7T of the increase was due to the increase in real estate, while $18T, or 84% of the increase, was due to a rise in the value of financial assets, including deposits, stocks, and pensions.

Sherle R. Schwenninger and Samuel Sherraden, New America Foundation, ‘The U.S. Economy After the Great Recession: America’s Deleveraging and Recovery Experience’