Reality destroys such pretenses. For a while, soaring stocks allowed millions of Americans to believe they were rich, or at least more secure. And when you feel rich, even if you aren't, you plan, spend and borrow. It's called the wealth effect. Suddenly that wealth evaporates, and the 20 percent of discretionary income so calmly budgeted for servicing consumer loans becomes ominously large.
Executive options shrink, and so do vacation plans and big houses.
Risk is thus reintroduced and understood anew. The risk quotient had been absent from the market for several years, says Michael Lament of Wright Investors' Service. And now that it is back, he says, it is not likely to be removed again quickly. If so, the change will have fundamental consequences for household budgets, businesses and government. A diminished sense of wealth can translate into weaker sales, slower economic growth and less tax revenue.