The wealth effect economy is the very straight forward proposition that rising asset prices lifts household’s marginal propensity to consume. It is very important to Western politicians and their central bank lackeys because it is the key offset to de-industrialisation. As local production shifts to cheaper emerging markets, interest rates fall and asset prices rise, triggering the greater consumption.
Yet, at a certain point this is no longer possible. Peak debt renders it impossible. In effect, this is what happened to the US in the GFC, when its externally funded consumption growth was derailed by excessive debt and the economy trailed house prices down.
That wealth shock appears to have made a lasting impression on US households. Even though much of the damage is repaired, households are more deleveraged and asset prices have surpassed previous highs, the US consumer is not interested in cashing out the housing ATM. This is doubtless owing to the shock of wealth loss and distrust in assets. It is also the huge retiring Boomer cohort. Also from Macquarie’s always excellent Viktor Shvets: