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Strategies & Market Trends : MDA - Market Direction Analysis

SPY 690.36

-0.5%

Jan 14 4:00 PM EST

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To: Zeev Hed who wrote (69520)	2/19/2001 5:28:56 PM
From: reaper	Read Replies (1) of 99985

Zeev You (and others) seriously over-estimate the effect of lower interest rates on aggregate consumption This Fed study federalreserve.gov notes that in the 1998-1999 re-financing boom, aggregate annual mortgage payments declined by $5.6 billion, on net, or about $680 for the average re-financing homeowner. that's not a lot of money (aggregate personal consumption expenditures are +/- $6 trillion in the US). it goes on to further point out that these savings are to some extent a zero-sum game, since every dollar a consumer saves on lower mortgage payments is a dollar less a saver (who owns say a money market fund) gets in interest payments. so yeah, i'm paying less on my new mortgage right now, but the fixed income part of my retirement portfolio is earning a lower rate of interest -- robbing from the future for current consumption, to some extent. the REAL effect comes not from lower payments but from stealing from home equity. this same Fed paper estimates that consumers liquidated $55 billion of equity in their homes in this 1998-1999 re-financing period (this does not include home-equity loans, only re-finances where large loans were taken out; if you include home equity loans the effect would obviously be larger). so the overall effect of the current re-financing boom is basically people stealing from the equity in their homes and from the interest income in their retirement/pension/insurance accounts to finance current consumption. robbing from peter to pay paul. somebody will need to explain to me why this is good for the economy. cheers

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