The Wealth Effect and Febezzle Effects|ManualTrader

The Wealth Effect and Febezzle Effects

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Wealth effect

When the stock price rises, the willingness to consume will increase accordingly.

When the stock price falls, the willingness to spend will also decrease.

The willingness to consume is crucial to the macro economy.

"Wealth effect" is the content of academic economics research. Mengxian admits that he has never studied economics, nor has he made a cent for predicting changes in macroeconomics, and he believes that most economics PhDs Underestimated the power of the "wealth effect" of stocks.

Based on the wealth effect, assuming that "stock prices affect consumer willingness" is a very important issue, then how much influence does the US stock market have on the economy?

Based on the data collected by the US Federal Reserve, five consumption phenomena are analyzed:

In the past ten years, the growth rate of net worth of American households may have been less than 100%.

The average family’s assets are still small.

The market value of the stock market may still account for less than one-third of the household’s net assets (after deducting pension accounts).

The consumption of the super-rich is disproportionate to their assets (expenses a lot, but all expenses are only the tip of the iceberg of their assets).

The concentration of stock assets in American households is incredibly high (the richest 1% of households may own 50% of the stock market value, while the poorest 80% of households may only have 4% of the stock market value).

If economists are asked to analyze based on the data collected by the Federal Reserve Committee, and based on the insignificant relationship between stock prices and consumption in the past, and the unprecedented stock market has risen continuously in the past decade, even if each family sells its stock 3% of assets are used for consumption, and the effect of stimulating consumption expenditure is less than 0.5% every year.

So economists can easily draw the following conclusions:

The "wealth effect" of stock prices driving consumption is not so great.

Munger believes that the above-mentioned economic thinking is greatly out of touch with reality. He believes that the Fed’s data collection does not properly take into account the impact of pensions and other similar programs.

Suppose there is a 63-year-old dentist whose private pension account was originally worth $1 million in stocks. When these stocks rose to $2 million, the dentist felt that he was rich and immediately changed to a new car.

This is an obvious correlation between stock prices and consumption, but many economists may only regard this as an ordinary act of profligacy.

But Munger believes that many people like this dentist spend a lot of money because of a powerful "wealth effect" related to pensions.

Munger wants the foundations present to understand that the "wealth effect" caused by the current pension plan is far greater than before and must not be ignored. Munger said this at the beginning, he should want to let the foundation personnel here feel that they have a major mission to the country's economy before entering the topic.

febezzle effect

Before explaining the "febezzle" created by Munger, let's get to know the source of his inspiration "bezzle".

The term "bezzle" is related to corruption. Harvard University Professor of Economics John Kenneth Galbraith (1908-2006) used "bezzle" to mean money obtained from undisclosed corruption.

Gao Berry found that bezzle has a very strong stimulating effect on consumption. Because money came easily, it was spent more generously. However, because the person whose money has been tainted does not know that his money has been tainted, his expenditure will not change as a result.

Gao Berry discovered the effect brought about by "bezzle", but the impact of "bezzle" on the finishing economy is limited, because "bezzle" cannot spread to a very large extent, and it is too big to be discovered sooner or later.

But Munger found that some things performed the same function as "bezzle", and the amount was large enough that it would not disappear in a short time like "bezzle" because it is easy to find.

He coined a few nouns like Gaubury:

1. "febezzle", the same thing as "bezzle"

2. "Fishing febezzle", the process of creating febezzle

3. "febezzle guests", people who fish for febezzle

He pointed out that an important source of ash gold is in this room. Everyone here just created a large number of febezzles and took many stupid measures in investment management. The foundation wastes 3% of its assets every year on redundant management costs that do not bring any revenue. In a situation where the value of the stock has been rising, even though a lot of money has been wasted, they will still feel that the money has increased.

Those "febezzle customers" (such as various investment consultants) who get 3% of the assets wasted by the foundation, think that their money is earned through normal channels.

The money used by these "febezzle customers" actually comes from a false "wealth effect" brought about by rising stock prices. Because the stock price would have risen, it was not the various advisers hired by the foundation to increase the stock price, but these advisers were able to take away 3% of the assets earned by the foundation.

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