Rod writes: And with every fall, wealth distribution becomes more equal,
and I am relatively better off.
yeah, there was growing equality after 1929, too.
But there was also the "reverse wealth effect" (the rich person's poverty
effect?) in which falling stock markets -- along with falls in other asset
markets, such as that for owner-occupied housing -- encourage a severe fall
of luxury spending. (The severity of the fall arises because of the
asymmetry of debt accumulation: it is much more pleasant to get into debt
-- including margin debt -- when the asset markets are going up than to go
into bankruptcy as asset markets fall.) Given the way in which the US
economy's recent boom has been based on consumer spending -- and increasing
consumer indebtedness -- this fall in luxury spending threatens to pop the
economy's bubble (which could then rebound to undermine asset markets
further). The resulting recession -- which has been encouraged by the
upward creep of short term interest rates that the Fed fomented -- would
then discourage non-luxury spending by the working class. It would also
shoot private real investment in the foot. Given the contractionary tilt of
fiscal policy and the large trade deficit, we'd been in for quite a ride. A
recession would help the US balance its trade, but it would also broadcast
recession to the rest of the world, which would sink the boats of those
countries that are just barely recovering from the last one, not to mention
those places like Japan which are mired in the muck.
The past accumulation of debt and the falling value of assets would then
make it very hard for the Fed to use low interest rates to get the economy
moving again.
As a tenured prof, I don't have to worry too much about my job. But what
happens if the supply of new students dries up?
BTW, since I can't predict the future, I should state an alternative
scenario. The Fed will cut interest rates _now_ and flood the asset markets
with liquidity. But won't that encourage the dreaded inflation? Saint Alan
is between a rock and a hard place?
Jim Devine [EMAIL PROTECTED] http://liberalarts.lmu.edu/~JDevine
