Deutsche Bank On Why Bernanke's "Wealth Effect" Trick Could Actually Work And Send GDP Way Higher

U.S. consumers are paying down debt faster and escaping the liability abyss they encountered in the wake of the housing market collapse, according to Deutsche Bank.

The result has been improvements in the household asset to liability ratio. While this includes an individual’s mortgage (around 75% of all liabilities), it also includes debts like credit cards and student loans.

But what’s this mean for Bernanke’s attempt to create the “wealth effect?” According to Deutsche Bank, this consumer deleveraging combined with the rise in stocks to their 2011 S&P 500 target of 1550 would take the asset to liability ratio close to equilibrium, at 2.08.

From Deutsche Bank (emphasis ours):

No doubt, higher equity prices, which the Fed is helping to engineer through risk taking via aggressively low interest rates, will aid in household balance sheet repair. Additionally, rising stock prices will also provide a counterweight to renewed sluggishness in home prices. The upshot is that the equity market will be a key variable in our forecast of above trend 2011 real GDP.

Bernanke’s stock price trick, coupled with a rapidly deleveraging consumer, could get this ratio back to equilibrium. That would be huge for consumer spending, and potentially propel GDP higher in 2011.


Photo: Deutsche Bank

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