Saving, Not Spending

This Boston Globe article, while interesting, is only a piece of the puzzle. Because if businesses are sitting on massive amounts of cash and refusing to hire, they’re really a much bigger reason why the economy is in such bad shape:

Homeowners are flocking to refinance their mortgage loans at record low interest rates, but unlike past refinancing waves, few are using their homes like ATMs and cashing out to buy cars, take vacations, or remodel, according to mortgage bankers and economic statistics.

This newfound frugality represents a sea change in how Americans have viewed their homes in recent years, when rising values provided a ready source of borrowed money to support spending. Cash-out refinancings have plunged 90 percent since peaking in 2006, according to Freddie Mac, the government-owned mortgage company.

Instead, homeowners are taking advantage of 30-year mortgage rates in the low 4 percent range, and 15-year rates that are even lower, to reduce debt, increase savings, and strengthen household finances. Michael Lou, for example, recently refinanced his Quincy home, shaving a percentage point off the interest rate and slashing his monthly payment by more than $250.

And where is the extra money going? Into savings.

“We try to put money away because you never know what will happen ,’’ said Lou, 39, who owns the home with his partner. “At any moment, one of us could lose our job.’’

Lou’s experience helps illustrate why historically low interest rates have provided just a modest boost to the US economy, which depends on consumer spending for about 70 percent of activity. The last time interest rates fell toward record lows, in mid-2003, consumer spending surged at an annual rate of nearly 6 percent, according to the Commerce Department. This year, consumer spending has increased at a 2 percent rate.

Cautious spending and increased saving will reduce household debt, increase disposable income, and strengthen the US economy in the long term, analysts said, but for now, it means subdued consumption and weaker economic growth.