Economics: Wall Street versus Main Street

Three rounds of quantitative easing by the Federal Reserve have produced record-high stock prices, but
real economic growth still remains below the levels expected in an economic recovery. An encouraging
uptick in housing prices and the gradual decline of the unemployment rate have helped bolster household
wealth and consumer spending, but with fiscal tightening weighing on economic growth, inflation falling,
and corporate earnings flat, the current rise in stock prices is unsustainable.

The US economy might be headed for another midyear “swoon,” and after three doses of easy money from the Fed, it is unclearwhether another round of quantitative easing would help produce the sort of robust growth policymakers and consumers seek.

Household savings rate fell to 2.6% in the first quarter, down from 5.1% in 2010. As Mr Makin points out, this is ominously similar to the pre-2007 pattern of high consumption based on the hope that asset prices would stay high. The potential long-term problem here is that asset prices tend to revert to the mean; people may be saving too little for their retirement on the view that markets will do all the work. As in 2007 and 2008, they may get a nasty shock later on.

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