By Steve Roth Wealth Economics This post is prompted by Matthew Klein’s (very wonky) post about recent changes in QE/QT, and the Fed’s balance sheet. It prompted me to do a quick calculation that I’ve been meaning to get to: when household wealth increases (due to stock-market price runups or really anything else), what effect does that have on household spending in the next year? I’m going to start with a bald two-part claim. A. The overwhelming effect/mechanism/transmission-channel for QE/QT is via equity prices. QE gooses share prices. It “fills up the punchbowl.” QT takes it away, or at least restrains those runups. B. There’s a resulting (weak) “wealth effect.” If people have more money/assets/wealth, they spend more. The
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by Steve Roth
Wealth Economics
This post is prompted by Matthew Klein’s (very wonky) post about recent changes in QE/QT, and the Fed’s balance sheet. It prompted me to do a quick calculation that I’ve been meaning to get to: when household wealth increases (due to stock-market price runups or really anything else), what effect does that have on household spending in the next year?
I’m going to start with a bald two-part claim.
A. The overwhelming effect/mechanism/transmission-channel for QE/QT is via equity prices. QE gooses share prices. It “fills up the punchbowl.” QT takes it away, or at least restrains those runups.
B. There’s a resulting (weak) “wealth effect.” If people have more money/assets/wealth, they spend more.
The wealth effect is weak, because:
1. The top 20% of income recipients own 87% of equity assets. (Aside: the top 10% of wealthholders own . . . 87% of equity shares.)
And:
2. “Velocity of wealth”: The top 20% of income recipients only turn over about 5% of their wealth in spending each year. The bottom 80% turn over about 25% a year. These are quite consistent velocities over the past 20+ years (though the top quintile’s velocity had trended down). We can assume they won’t change very much in the next year.
So for every 1% increase in household equity asset holdings (currently a ~$625B increase), the next year’s spending increases by .17%:
This is only counting the wealth-driven extra spending over the next year. It continues for ensuing years, though perhaps at a decaying rate. (Calculating that decay rate would require some quite muscular assumptions compared to the fairly straightforward arithmetic here.)
QE/QT don’t only affect equity-asset prices, of course. And equity assets are only 35% of household-sector total assets. But I hope this envelope-calc helps give my gentle readers a sense of magnitude, at least, when considering the “wealth effect” of government’s monetary and fiscal actions.