Wednesday, June 13, 2012

The Trickle-Up Effect

The price on the gasoline pump at the station on the corner is one of my investment management flags. It says that times will improve for a while.

This price has edged down from $4.69 a gallon in January to $4.29 a gallon today. This change has given commuters a extra $4 or so in the pocket for every tank of gas they buy. This feeds the economy from the bottom, slowly pumping it up. That increasing health adds to the Dow's growth in an example of a "trickle-up effect".

As the world's economy gets healthier and healthier and people begin to drive more, the increase in demand drives the price of gas up once again, until driving is curtailed - once again. And then the stock market totters and crashes a bit. Once again.

Such a trickle-up effect should be easy for an economics student to prove. Data on the varying price of gas, miles driven per month, and smoothed averages in the Dow might be all that is needed to show the relationship between gas price changes, driving patterns, and stock market ups and downs.

Already, it works for me.

This is not to say that the trickle-down effect doesn't work. The university whose professor invented the trickle-down effect just built a building named after him, from donor money - an example of the trickle-down effect at work. But donors tend to sit on their cash in hard times, and not spend money when the economy is down. The inventor of the trickle down effect didn't, I've read, anticipate this defect in his scenario.

Perhaps if the money that fails to trickle down were channelled into keeping gas prices low, the trickle up effect could then make more money trickle down. Just a thought.

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