Unrealized gains in wealth
I’ve been thinking a lot about unrealized gains and their effect on the global economy. if you remember, I wrote a few weeks ago about a new debit card that lets people tap the money from their 401(k) plan. I think these cards are a bad idea. I don’t like them because it is like margin trading where people tap unrealized gains that may artificially boost available credit to unsustainable levels. But, here’s the rub: these types of unrealized gains in wealth are helping sustain spending in difficult times.
During the Great Depression there were no HELOCs (Home Equity Lines of Credit), there were no 401(k) debit cards and there were no credit cards. As the economy in the U.S. and elsewhere worsens, people with substantial credit alternatives are beginning to feel pain. Those people would have added to the substantial negative feedback loop in the Great Depression. Today those same peopl have ways to tap into unralized gains in wealth in their homes, future income, and retirement savings in rder to sustain spending
While savings may need to go up over the long term in the US, it was negative during the most difficult years of the Great Depression as people tapped savings to sustain themselves. Without savings today, people are going to have to tap credit and unrealized gains. Is that a bad thing?
This is an issue I have yet to come to terms with. I think it is something to watch as ‘prime’ borrowers feel the real economy effects of the U.S. slowdown.