Re: The tale of two commodities and the "wealth effect"

Tee Bee,

You are mixing up different ideas.

The first article you refer to talks about people reducing their spending when they lose stored wealth. That is to say, item X decreases in value so they buy less or more of item Y. As far as correlation between the two I would think the decline in value of a person's home will have a minimal impact upon their purchasing of Charbucks products. However, their ability to command capital declines.

When gasoline goes up yes, people will drive less. This time the claim is price in item X goes up so people buy and use less of item X. I see not contradiction.

Also, it is wrong to consider houses as commodities. Two barrels of sweet light crude are pretty much the same no matter where they come from. Houses vary in many different factors. A house built by Kassner is not the same as one built by Koeppel, even if the square footage is the same the Kassner house will command more.

Also remember house values while important is just "paper" wealth. We have to part with cash to buy gas.