Blowing large bubbles (Photo credit: Wikipedia)
THE WEALTH EFFECT.
Since the housing bust and the corresponding economic downturn in 08, the Fed has been trying to create the “wealth effect”, using its double-edged sword of near zero interest rates and injecting counterfeit money into the banking system. I don’t know if they realize it or not but this double-edged sword is what caused the artificial housing boom which collapsed in 08.
The wealth effect starts from the Keynesian belief that consumption drives the economy. A vast majority of economists, politicians, and bureaucrats believe that if individuals feel wealthier because the value of the stocks and bonds they own are increasing, and the value of their house is also increasing, they will spend more. This increase in consumption [aggregate demand] they believe, is what drives the economy. Unfortunately if the policies they are implementing are based on a fallacy, the policies will also be fallacious.
WHAT DRIVES THE ECONOMY SAVINGS OR SPENDING?
The truth is savings, capital formation, and entrepreneurial activity is what drives the economy, not consumer spending. (more…)
AUSTRIAN ECONOMICS ADDICT 