FEAR & GREED | Business News Ask Fear & Greed: Is the 'wealth effect' real?
May 23, 2025
The podcast dives into the intriguing concept of the 'wealth effect,' unpacking how rising house prices and falling interest rates might make people feel richer. It explores the connection between perceived wealth and consumer spending, revealing how these feelings can impact economic behavior. The discussion highlights the psychological aspects of wealth perception and how fluctuations can influence spending habits, even if actual cash reserves remain unchanged. It's a captivating look at how our thoughts about wealth can drive real economic activity.
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Simple Pay Rise Example
- Sean Aylmer uses a pay rise example to explain the wealth effect in an everyday context.
- Getting more pay often makes people feel wealthier and encourages more spending, like eating out or ordering takeaway.
Wealth Effect Boosts Economy
- The wealth effect means feeling wealthier leads to spending more, especially on durable goods and services.
- This increased spending boosts the economy through a positive circular effect.
Perceived Wealth Drives Spending
- Rising house prices make people feel wealthier, influencing them to spend more despite no actual rise in cash.
- Feeling less wealthy, like during the pandemic, causes people to spend less and adopt austerity.