Hurricanes And The Economy

[Aargh]

Insurance claims could reach $200 billion. Throw in FEMA payments and there could be $300 billion thrown into the economy in hurricane recovery.

The $200 billion from insurance is likely to be pulled out of investments and put into the economy. That would seem to put a little negative bump on Wall Street as money is moved out of investment and into the economy. A lot of that money is going to go to construction workers, roofers, and others in the work force. Those people will spend the money they get, which creates a multiplier effect on money pulled out of investment and put into the economy.

Am I remembering my Econ classes right on how that would work?

Eventually all the money that goes to those who spend it will end up back in the top end of the economic food chain. US economy works a little like Vegas slot machines. Maybe 97% of every dollar that ends up in net revenues goes back into the economy in the form of salaries and consumption, but 3% stays with the house. That 97% tends to get spent repeatedly and the house keeps 3% every time. Eventually the house gets it back. 97/3 is for example only. That's what casinos promote in order take more than that from their constituents.

If those assumptoions are correct, there could be a little slump in the stock market while there's a substantial boost to the economy. Over a period of several years, most of the money that was pulled out of Wall Street will end up back there or in some other investment vessel.

[wufan]

A few interesting points from this post:

Does investing in stocks hurt or help the economy?
Does spending hurt or help the economy?
How do you close the wealth gap between rich and poor if the rich always win?

[wu_shizzle]

The Broken Window fallacy is back

[wufan]

The Broken Window fallacy is back

Thanks for sharing that.

[Kung Wu]

The $200 billion from insurance is likely to be pulled out of investments and put into the economy. That would seem to put a little negative bump on Wall Street as money is moved out of investment and into the economy.

Interesting thread!

The way I see it ...

For every seller, there must be a buyer. If $200B is being "pulled out of investments" by insurers, then somebody else is buying nearly $200B in investments to make that transaction happen.

True, the price on bonds will dip a bit, but macroscopically speaking the bonds are conservative (90%+ are in Class 1 rated bonds). So the bonds can be liquidated quickly with fairly predictable price expectations. In 2008, the property/casualty insurance industry was sitting on about $495B of those types of assets alone (out of $1.2T of premiums invested).

So to me, the loss occurs primarily as projected income off fixed-interest bearing bonds to insurers.

Also, I am sure the property/casualty industry will be eager to restore it's stockpile of investments of premiums to prepare for future events, so we will see insurance premiums rise.

Anyway that's my $0.02 Shockernet analysis.

[Aargh]

The Broken Window fallacy is back

That priniciple is based on the fact that the shopkeeper would have spent the money to replace the broken window on something else, which is true if the shopkeeper did not have insurance.

When you throw insurance into the mix, the shopkeeper doesn't have to reduce spending somewhere else in order to replace the window. The shopkeeper has paid and will pay to replace the window, but he probably pays for the window over a period of 10 years instead of all at once. That's a significant difference.

With insurance, the economic impact of replacing the window is felt immediately, while the economic impact of paying to replace the window is felt over a much longer time frame.

[Rocky Mountain Shock]

Not all damage that's been done will be repaired. Case in point: New Orleans and its all but still empty Lower 9th Ward.

Other considerations such as lost incomes and lowered productivity will need to be factored in.

Count me in the crowd that believes broken windows are bad, not good, for the economy.