Currently, the wealth effect is reversing. As stock and home values drop, Americans are scrambling to increase savings and curb spending. Down goes consumer spending. The plausible math is daunting.
Since September 2007, Americans' personal wealth has dropped about $9 trillion, says economist Nigel Gault of IHS Global Insight. A common estimate is that every dollar's change in wealth causes people to change their spending by 5 cents.
If so, the hit to consumer spending would be $450 billion ($9 trillion times .05). The effect and deflation could last over several years.
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