n. A reduction in consumer spending based on a perception of relative poverty caused by the decreasing value of stock market portfolios.
Some economists are already talking about a 'poverty effect' caused by sinking stock prices. This, of course, is the reverse of the 'wealth effect' — where fattening portfolios boosted spending confidence. A good number, unfortunately, didn't sell stock to make the purchases. Rather, they used it as collateral to borrow more money.
Now this 'wealth effect,' as it is known, is being unwound, and the economy may soon feel the chilling impact of a 'poverty effect.' Simply stated, says Nobel laureate and Massachusetts Institute of Technology economist Franco Modigliani: 'The stock market controls the wealth of people. If they are poorer, they are less likely to buy Ferraris.'