Welcome to Ask Fear and Greed, where we answer questions about business, investing, economics, politics, and more. Are Michael Thompson and Hello Sean Aleman.

Welcome to Ask Fear and Greed, where we answer questions about business, investing, economics, politics, and more. Are Michael Thompson and Hello Sean Aleman.

Hello Michael, Sean.

Hello Michael, Sean.

I like this question today because if it's about a term that I have used on a number of occasions, being ninety eight percent sure that I'm using it correctly. But anyway, look, we hear about kind of with house prices up and interest rates coming down and people having a bit more money and feeling like they've got a bit more money. We hear the term the wealth effect being bandied about. Can you please explain it and just put my mind at ease that I've been using it correctly and haven't been making a fool of myself. And I'm getting my haircut and talking about the wealth effect of the.

I like this question today because if it's about a term that I have used on a number of occasions, being ninety eight percent sure that I'm using it correctly. But anyway, look, we hear about kind of with house prices up and interest rates coming down and people having a bit more money and feeling like they've got a bit more money. We hear the term the wealth effect being bandied about. Can you please explain it and just put my mind at ease that I've been using it correctly and haven't been making a fool of myself. And I'm getting my haircut and talking about the wealth effect of the.

Barber, ah, the barber. Yeah, this one's easy. If I said to you, Michael, you are going to get an extra five hundred dollars or one hundred dollars away week in your pay packet, yep, and we start next week.

Barber, ah, the barber. Yeah, this one's easy. If I said to you, Michael, you are going to get an extra five hundred dollars or one hundred dollars away week in your pay packet, yep, and we start next week.

Great, I'm happy.

Great, I'm happy.

So you're going from four hundred dollars a week to eight hundred dollars a week. Will big increase on thousand dollars a week to let's say twelve hundred let's make it more realistic, fifty bucks a week. So you're going on thousand dollars a week to twelve hundred dollars a week. What would you do? Honestly, what would you do? Don't think about it to say, well.

So you're going from four hundred dollars a week to eight hundred dollars a week. Will big increase on thousand dollars a week to let's say twelve hundred let's make it more realistic, fifty bucks a week. So you're going on thousand dollars a week to twelve hundred dollars a week. What would you do? Honestly, what would you do? Don't think about it to say, well.

Ah, I just go okay, I've just got more of a buffer for everything. I don't. It doesn't actually change, but I do. But suddenly I am not so careful about what I'm spending on.

Ah, I just go okay, I've just got more of a buffer for everything. I don't. It doesn't actually change, but I do. But suddenly I am not so careful about what I'm spending on.

That's good. So if you decide to let's have takeaway tonight for dinner rather than yep, that's so if I got to pay rise, I reckon Jackie and I'd go out for dinner. That's it. Yeah, yeah, yeah, I mean that's like, oh, this is really exciting. Let's celebrate. Let's go out for dinner. Ah, gotchat you much? Gotcha? You've got young kids. You say let's have takeaway tonight rather than cooking, because this is great. We've got more of a buffer. Yeah, that is the wealth effect. You feel well and as a result, you go on and spend more money. Now, it's real, it's very cool. The wealth effect, because there's been lots of studies done won by the Reserve Bank a few years back, and it actually says there is a positive and stable, so consistent relationship between household wealth and consumption, and mostly when you feel wealthier, the beneficiaries in terms of the business is selling what they're selling motor vehicles, durable goods, so I think fridges, TVs, and then other discretionary spending so restaurants, that type of thing. So it's a real fact in economics, the wealth effect. When people feel wealthier, they spend more. Now, of course, when you spend more, that has a self fulfilling function where there picks up and suddenly you're more likely to earn more money. So it's a great circular part of the economy, the wealth effect, where if you can get it going and everyone's thinking about it, things do actually pick up.

That's good. So if you decide to let's have takeaway tonight for dinner rather than yep, that's so if I got to pay rise, I reckon Jackie and I'd go out for dinner. That's it. Yeah, yeah, yeah, I mean that's like, oh, this is really exciting. Let's celebrate. Let's go out for dinner. Ah, gotchat you much? Gotcha? You've got young kids. You say let's have takeaway tonight rather than cooking, because this is great. We've got more of a buffer. Yeah, that is the wealth effect. You feel well and as a result, you go on and spend more money. Now, it's real, it's very cool. The wealth effect, because there's been lots of studies done won by the Reserve Bank a few years back, and it actually says there is a positive and stable, so consistent relationship between household wealth and consumption, and mostly when you feel wealthier, the beneficiaries in terms of the business is selling what they're selling motor vehicles, durable goods, so I think fridges, TVs, and then other discretionary spending so restaurants, that type of thing. So it's a real fact in economics, the wealth effect. When people feel wealthier, they spend more. Now, of course, when you spend more, that has a self fulfilling function where there picks up and suddenly you're more likely to earn more money. So it's a great circular part of the economy, the wealth effect, where if you can get it going and everyone's thinking about it, things do actually pick up.

And I often see it kind of talked about when house prices are rising and suddenly people are seeing the value of their potentially their biggest asset going up and up and up. Is that kind of having the same effect that they feel wealthier even though there is not actually necessarily any more money in their bank account. They are feeling wealthier, therefore they are feeling more inclined to spend.

And I often see it kind of talked about when house prices are rising and suddenly people are seeing the value of their potentially their biggest asset going up and up and up. Is that kind of having the same effect that they feel wealthier even though there is not actually necessarily any more money in their bank account. They are feeling wealthier, therefore they are feeling more inclined to spend.

Yes, So people always use housing as an example, yep, And I think that's true because it is your biggest asset. But you could throw superannuation in there. I mean, I check my superannimation balance this week and I haven't done it for months, and I've just seen what the market's done and I had more than I thought. That made me feel good. I think pay ris is a big one. I mean, you definitely feel more wealthy because that's ongoing. What is kind of interesting. It also works the other way, so when you feel less wealthy, you do tend to spend less. So I'm sure. So during the pandemic we were doing fear and greed, I had another source of income which disappeared because of the pandemic. I certainly tightened things up like I just didn't. And yeah, in the end, I kind of knew it didn't make that much difference to me long term, but I just didn't feel as wealthy, so I stopped spending. And so it does work in reverse as.

Yes, So people always use housing as an example, yep, And I think that's true because it is your biggest asset. But you could throw superannuation in there. I mean, I check my superannimation balance this week and I haven't done it for months, and I've just seen what the market's done and I had more than I thought. That made me feel good. I think pay ris is a big one. I mean, you definitely feel more wealthy because that's ongoing. What is kind of interesting. It also works the other way, so when you feel less wealthy, you do tend to spend less. So I'm sure. So during the pandemic we were doing fear and greed, I had another source of income which disappeared because of the pandemic. I certainly tightened things up like I just didn't. And yeah, in the end, I kind of knew it didn't make that much difference to me long term, but I just didn't feel as wealthy, so I stopped spending. And so it does work in reverse as.

Well, oh completely, and I have the same kind of thing. As soon as there's any one of those kind of hits that make you feel like you have less money to spend. We just implement what we call extreme austerity measures, and there's just like no spending on anything, and suddenly you see it is and it's all in your head.

Well, oh completely, and I have the same kind of thing. As soon as there's any one of those kind of hits that make you feel like you have less money to spend. We just implement what we call extreme austerity measures, and there's just like no spending on anything, and suddenly you see it is and it's all in your head.

It's like a real in your head. Well, actually that's not quite true, because you are richer. So the value of your house increases, you are richer. So if you have a mortgage of five hundred thousand dollars in your house, is worth one point five suddenly becomes one point seven. You have more equity in your house. Yep, so you actually are richer.

It's like a real in your head. Well, actually that's not quite true, because you are richer. So the value of your house increases, you are richer. So if you have a mortgage of five hundred thousand dollars in your house, is worth one point five suddenly becomes one point seven. You have more equity in your house. Yep, so you actually are richer.

Yeah yeah, even though you don't necessarily have that money.

Yeah yeah, even though you don't necessarily have that money.

You don't have the cash.

You don't have the cash.

Yeah yeah, So okay, that's fascinating. So generally I think I have been using it correctly when I've been talking about it at Billy's Barbershop.

Yeah yeah, So okay, that's fascinating. So generally I think I have been using it correctly when I've been talking about it at Billy's Barbershop.

Yes, at Billy's Barbishop really a big fan of the wealth effect, I'd imagine, Well, he listens to the podcast, so does it.

Yes, at Billy's Barbishop really a big fan of the wealth effect, I'd imagine, Well, he listens to the podcast, so does it.

Anyway, Look, I think we can tick this one off. Thank you very much, Sean, Thank you, Michael, And remember, if you've got something that you'd like to know, then please send me your question on LinkedIn Instagram, Facebook, or at Fear and Greed dot com dot au. I'm Michael Thompson and this is ask Fear and Greed

Anyway, Look, I think we can tick this one off. Thank you very much, Sean, Thank you, Michael, And remember, if you've got something that you'd like to know, then please send me your question on LinkedIn Instagram, Facebook, or at Fear and Greed dot com dot au. I'm Michael Thompson and this is ask Fear and Greed