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Speaker 1: Welcome to Ask Fear and Greed, where we answer questions

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Speaker 1: about business, investing, economics, politics, and more. Are Michael Thompson

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Speaker 1: and Hello Sean Aleman.

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Speaker 2: Hello Michael, Sean.

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Speaker 1: I like this question today because if it's about a

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Speaker 1: term that I have used on a number of occasions,

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Speaker 1: being ninety eight percent sure that I'm using it correctly.

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Speaker 1: But anyway, look, we hear about kind of with house

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Speaker 1: prices up and interest rates coming down and people having

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Speaker 1: a bit more money and feeling like they've got a

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Speaker 1: bit more money. We hear the term the wealth effect

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Speaker 1: being bandied about. Can you please explain it and just

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Speaker 1: put my mind at ease that I've been using it

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Speaker 1: correctly and haven't been making a fool of myself. And

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Speaker 1: I'm getting my haircut and talking about the wealth effect

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Speaker 1: of the.

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Speaker 2: Barber, ah, the barber. Yeah, this one's easy. If I

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Speaker 2: said to you, Michael, you are going to get an

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Speaker 2: extra five hundred dollars or one hundred dollars away week

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Speaker 2: in your pay packet, yep, and we start next week.

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Speaker 1: Great, I'm happy.

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Speaker 2: So you're going from four hundred dollars a week to

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Speaker 2: eight hundred dollars a week. Will big increase on thousand

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Speaker 2: dollars a week to let's say twelve hundred let's make

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Speaker 2: it more realistic, fifty bucks a week. So you're going

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Speaker 2: on thousand dollars a week to twelve hundred dollars a week.

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Speaker 2: What would you do? Honestly, what would you do? Don't

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Speaker 2: think about it to say, well.

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Speaker 1: Ah, I just go okay, I've just got more of

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Speaker 1: a buffer for everything. I don't. It doesn't actually change,

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Speaker 1: but I do. But suddenly I am not so careful

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Speaker 1: about what I'm spending on.

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Speaker 2: That's good. So if you decide to let's have takeaway

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Speaker 2: tonight for dinner rather than yep, that's so if I

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Speaker 2: got to pay rise, I reckon Jackie and I'd go

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Speaker 2: out for dinner. That's it. Yeah, yeah, yeah, I mean

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Speaker 2: that's like, oh, this is really exciting. Let's celebrate. Let's

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Speaker 2: go out for dinner. Ah, gotchat you much? Gotcha? You've

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Speaker 2: got young kids. You say let's have takeaway tonight rather

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Speaker 2: than cooking, because this is great. We've got more of

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Speaker 2: a buffer. Yeah, that is the wealth effect. You feel

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Speaker 2: well and as a result, you go on and spend

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Speaker 2: more money. Now, it's real, it's very cool. The wealth effect,

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Speaker 2: because there's been lots of studies done won by the

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Speaker 2: Reserve Bank a few years back, and it actually says

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Speaker 2: there is a positive and stable, so consistent relationship between

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Speaker 2: household wealth and consumption, and mostly when you feel wealthier,

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Speaker 2: the beneficiaries in terms of the business is selling what

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Speaker 2: they're selling motor vehicles, durable goods, so I think fridges, TVs,

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Speaker 2: and then other discretionary spending so restaurants, that type of thing.

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Speaker 2: So it's a real fact in economics, the wealth effect.

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Speaker 2: When people feel wealthier, they spend more. Now, of course,

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Speaker 2: when you spend more, that has a self fulfilling function

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Speaker 2: where there picks up and suddenly you're more likely to

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Speaker 2: earn more money. So it's a great circular part of

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Speaker 2: the economy, the wealth effect, where if you can get

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Speaker 2: it going and everyone's thinking about it, things do actually

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Speaker 2: pick up.

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Speaker 1: And I often see it kind of talked about when

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Speaker 1: house prices are rising and suddenly people are seeing the

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Speaker 1: value of their potentially their biggest asset going up and

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Speaker 1: up and up. Is that kind of having the same

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Speaker 1: effect that they feel wealthier even though there is not

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Speaker 1: actually necessarily any more money in their bank account. They

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Speaker 1: are feeling wealthier, therefore they are feeling more inclined to spend.

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Speaker 2: Yes, So people always use housing as an example, yep,

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Speaker 2: And I think that's true because it is your biggest asset.

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Speaker 2: But you could throw superannuation in there. I mean, I

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Speaker 2: check my superannimation balance this week and I haven't done

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Speaker 2: it for months, and I've just seen what the market's

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Speaker 2: done and I had more than I thought. That made

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Speaker 2: me feel good. I think pay ris is a big one.

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Speaker 2: I mean, you definitely feel more wealthy because that's ongoing.

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Speaker 2: What is kind of interesting. It also works the other way,

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Speaker 2: so when you feel less wealthy, you do tend to

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Speaker 2: spend less. So I'm sure. So during the pandemic we

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Speaker 2: were doing fear and greed, I had another source of

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Speaker 2: income which disappeared because of the pandemic. I certainly tightened

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Speaker 2: things up like I just didn't. And yeah, in the end,

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Speaker 2: I kind of knew it didn't make that much difference

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Speaker 2: to me long term, but I just didn't feel as wealthy,

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Speaker 2: so I stopped spending. And so it does work in

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Speaker 2: reverse as.

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Speaker 1: Well, oh completely, and I have the same kind of thing.

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Speaker 1: As soon as there's any one of those kind of

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Speaker 1: hits that make you feel like you have less money

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Speaker 1: to spend. We just implement what we call extreme austerity measures,

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Speaker 1: and there's just like no spending on anything, and suddenly

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Speaker 1: you see it is and it's all in your head.

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Speaker 2: It's like a real in your head. Well, actually that's

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Speaker 2: not quite true, because you are richer. So the value

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Speaker 2: of your house increases, you are richer. So if you

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Speaker 2: have a mortgage of five hundred thousand dollars in your house,

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Speaker 2: is worth one point five suddenly becomes one point seven.

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Speaker 2: You have more equity in your house. Yep, so you

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Speaker 2: actually are richer.

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Speaker 1: Yeah yeah, even though you don't necessarily have that money.

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Speaker 2: You don't have the cash.

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Speaker 1: Yeah yeah, So okay, that's fascinating. So generally I think

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Speaker 1: I have been using it correctly when I've been talking

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Speaker 1: about it at Billy's Barbershop.

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Speaker 2: Yes, at Billy's Barbishop really a big fan of the

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Speaker 2: wealth effect, I'd imagine, Well, he listens to the podcast,

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Speaker 2: so does it.

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Speaker 1: Anyway, Look, I think we can tick this one off.

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Speaker 1: Thank you very much, Sean, Thank you, Michael, And remember,

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Speaker 1: if you've got something that you'd like to know, then

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Speaker 1: please send me your question on LinkedIn Instagram, Facebook, or

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Speaker 1: at Fear and Greed dot com dot au. I'm Michael

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Speaker 1: Thompson and this is ask Fear and Greed