Financial Accelerator

It sounds like a product featured in a pre-roll YouTube ad, promising that you can turn $1,000 into $1 million by using their patented trading techniques. "I was eating dry Rice-A-Roni out of a box because I couldn't afford my water bill...but just six weeks using the patented techniques of the Financial Accelerator and I just bought my third Lamborghini!"

In reality, the term "financial accelerator" refers to a relationship that can exist between overall economic trends and the impact they have on the financial markets.

A country falls into recession. The stock market plunges as a result. Because the stock market plunges, the recession deepens.

That's the basic action behind the financial accelerator. Tough economic times lead to weakness in financial markets. The wealth lost and the confidence eroded by the falling markets further exacerbate the economic situation. There's a feedback loop between economic conditions and financial markets that can amplify the impact of a situation.

This process can work in the other direction as well. Strong economic conditions drive financial markets higher, creating additional wealth and confidence, which feed further economic growth...the financial accelerator working as a positive feedback loop.