Wealth Shock

Whether the much discussed bailout happens or not, the underlying reality will not change. Arnold Kling points out that we are seeing the first wave of wealth shock, i.e. the shock of losing a great deal of wealth. The important point is this: this is only the first wave. You and I can’t control the fate of the bailout, but we can make adjustments to live with wealth shock. I think the main effect we’ll see, aside from plunging home prices, is a healthy increase in interest rates. Should that happen, it will ripple through the economy. It will be uneconomical for some companies to grow or even run in place. I expect higher unemployment and more economic stress on households where costs are growing faster than income.

Gosh, aren’t those the things we’re trying to avoid with the bailout? Yep – it looks to me like the consequences of past actions are unavoidable. The only real choice is whether we take our medicine all at once or slowly over time.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: