Phorgy Phynance

Archive for the ‘Wealth Effect’ Category

Consumers headed for trouble

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Did I mention I love The Big Picture?

I remember a while back I was sitting at lunch with some colleagues and I asked the question, “What is the fundamental law that drives markets, economies, etc?” One person responded “arbitrage pricing” *BZZT*

Arbitrage pricing may place a constraint on market price dynamics (and ultimately economies), but it doesn’t drive the dynamics itself. In my opinion, the fundamental law that drives markets and economies is the wealth effect. As Ritholtz points out, with house prices declining and mortgage rates increasing, consumers are suddenly becoming less optimistic about their future wealth. What impact could that have on markets?

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Written by Eric

July 11, 2007 at 3:17 pm