FED must halt $4 trillion 'Poverty Effect'

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FED MUST HALT $4 TRILLION ‘POVERTY EFFECT' Thursday,March 15,2001 By BETH PISKORA

A WHOPPING $4 trillion has disappeared from the valuations of publicly traded stocks since the market topped out a year ago - and the loss is taking its toll on Americans. This is the downside of the "wealth effect" that Federal Reserve Chairman Alan Greenspan derided - which he said was making Americans feel wealthier than they really were when the markets were at their exuberant highs.

Perhaps we might want to rename it the "poverty effect."

Looking at brokerage statements or 401(k) plan reports that register losses instead of gains, Americans are hunkering down and spending less.

Retailers are already feeling the pinch as inventories build up for lack of shoppers.

Other areas of consumer spending - travel, automobiles, new homes - are also growing at a slower rate than in recent years.

And as all those things grind to a halt, so does the economy - and everyone's standard of living.

It's somewhat of a vicious circle: the markets fall because the economy is slowing, consumers aren't spending because the markets are falling, the economy is slowing because consumers aren't spending.

This big ball of destruction keeps tumbling down the hill, gathering speed and bulk as it goes, and it will prove difficult to break the cycle.

Assets in money-market funds and bank CDs are at all-time highs, while stock mutual funds have been registering outflows for almost a year.

Even tax-refund money, which usually creates a stock spurt this time of year, is not being invested in the markets. Investors are holding back, waiting for an upturn.

But the markets will not recover on their own. The economy will not recover on its own. It all depends on consumer spending.

The United States has never come out of a recession until consumers became confident about spending their hard-earned cash. And consumers are not going to return to confidence unless Greenspan gives them a darn good reason why they should.

A big rate cut should do it. If the Fed cuts rates by half a percentage point next week and another half a percentage point before summer - the scenario that most economists expect - short-term interest rates will be at 4.5 percent.

Mortgage rates, in that scenario, will probably be around 5.5 percent for a 30-year loan, the lowest they've been in two years.

Credit-card rates would also be the lowest in years. Low rates for consumer loans always act as an incentive for spending.

Greenspan knows that the consumer is all-important to the U.S. economy.

After all, spending by consumers drives two-thirds of U.S. economic growth.

And if consumers continue to believe they've suffered the loss of $4 trillion without the expression of concern from the Fed, they will not do their part to get things going again.

http://www.newsdirectory.com/go/?r=ny&u=www.nypostonline.com

-- Martin Thompson (mthom1927@aol.com), March 15, 2001

Answers

Not to mention ones gas bill going from $40 to $250 a month in a matter of a few months. That might curtail ones spending habits.

-- NdewT (NdewTyme@Ndew.com), March 16, 2001.

Don't expect much from Alan Greenspan. He's delusional, stupid and easily influenced by bad company (of which he keeps plenty). Rate cuts won't help much, anyway, in the long term. The underlying problem is that the collosal economic expansion of the last 200 or so years rested upon the availability of cheap, abundant fossil fuels. Now those fuels are running out and there is nothing to replace them, at least at the levels of consumption that we have come to treat as normal. Stop dreaming about rate cuts and plant a garden.

-- Eugene Marner (carolegene@catskill.net), March 16, 2001.

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