THE PERFECT STORM 95you got a pay raise, they would tax it, but if the cost of things
you buy is lower, they can’t tax the savings. What’s not to like?
That’s the good news.
Economists assume this extra money in your pocket will
immediately be spent. That extra spending might put some
money in someone else’s pocket. For example, if you spend
your $100 weekly savings from gasoline going out to dinner,
you might tip the waiter $15, at which point the waiter has an
extra $15 (maybe more if your neighbors are doing the same
thing), and he can spend more, and so on.
This is the famous “multiplier” effect at work, where an
extra amount of spending leads to more spending by the re-
cipients so that the total economic growth, what economists
call “aggregate demand,” is higher than the initial spending.
More good news. At least that’s what you’ll hear on television.
When you look beneath the surface, however, you’ll see
some things that are not so good, are maybe even bad, for your
portfolio.
For example, just because someone has an extra $100 in
his pocket does not mean he’ll run out and spend it in knee-
jerk fashion like Pavlov’s dog. Many people may use the money
to pay down debt including credit cards, student loans, auto
loans, home equity loans and other forms of credit.
That can be a prudent thing to do, but it adds nothing to
GDP. It’s just a form of deleveraging. Both sides of your person-
al balance sheet, cash and debt, are reduced. There’s nothing
wrong with that, but there is no increase in aggregate demand
and no mystic multiplier.
Also, when you spend $2 per gallon less at the pump, that
means someone else — the oil company — is getting $2 less.
Your gain is their loss. None of us needs to shed a tear for Big
Oil, but the practical effects of greatly reduced oil prices and
energy company revenues show up in damaging ways. The
low price of oil causes new projects to be delayed and existing