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Borrow money? ‘No thanks,’ say consumers

  • Three-quarters of  Americans are not inclined to take on debt right now.
  • The Federal Reserve  announcement to keep rates low to 2015 may have dampened borrowing.
  • Uncertainty is  affecting consumer confidence, which impacts borrowing.
Financial  Security Index Charts » Borrow Money? No Thanks, Say Consumers
The Federal Reserve’s latest declaration to keep interest rates shockingly  low until 2015 has not galvanized the populace into borrowing truckloads of  money. In fact, most consumers say the Fed’s announcement does little to make  them more inclined to borrow money, according to Bankrate’s October Financial  Security Index.
Just 23 percent of consumers say they are tempted to take on more debt, but  74 percent say “no thanks” to low-rate borrowing right now, Bankrate’s survey  reveals.
At the Sept. 13 meeting of the Federal Open Market Committee, the Federal  Reserve’s monetary policy group, it was announced that the federal funds rate —  the very short-term interest rate controlled by the Fed — will remain close to  zero percent for a year longer than the group previously thought.
Though one of the stated aims of the central bank’s policy is to stimulate  economic activity through consumer spending and borrowing, economic theory  posits that the announcement may have the opposite consequence in the short  term, according to Bill Hampel, senior vice president of research and policy  analysis and chief economist at the Credit Union National Association.
“If anything, the effect of the announcement itself would be to reduce  borrowing today,” he says. “Some people may want to borrow now because credit is  so cheap, but you’ve just told them you don’t need to rush out and borrow now  because it is going to be cheap next quarter, next year, the year after that and  the year after that.”
Even in normal times, though, consumer loan demand is rarely moved by  interest rates, says Hampel.

What affects consumer borrowing

Though consumers do shop by price when they need a loan, a squishier metric  is actually more influential when it comes to deciding whether to take on more  debt: consumer confidence.
“If people were comfortable that they would be able to find jobs or keep  their jobs, then, even if rates were a little bit higher, they would be willing  to borrow more and spend. But that is not the situation,” says Brian Rehling,  managing director and chief fixed-income strategist at Wells Fargo Advisors.
Uncertainty about everything from the recession in Europe, the presidential  election and the looming fiscal cliff is limiting consumer confidence — as is  the still-high unemployment rate, currently 7.8 percent, according to the Bureau  of Labor Statistics.
All of that might be bearable if household incomes were moving up. But they  aren’t.
“Median income continued to fall even after the recession ended,” says Robert  Barone, economist, portfolio manager and partner at Universal Value Advisors in  Reno, Nev.
Data from the Census Bureau released in mid-September show that real median  household income in 2011 was $50,054, down 8.1 percent from 2007, the year  before the recession began. Real income reflects the erosive effects of  inflation.
“In today’s environment, it’s upside down: Incomes are falling. So, when  incomes are falling, people worry, ‘How am I going to pay it back if I borrow?’  no matter what the interest rate is,” Barone says.

No shortage of debt

While more consumer spending would boost economic activity, consumers are  still recovering from previous spending binges.
The most recent numbers from the Federal Reserve showed that total household  debt is at 103 percent of disposable income.
Hampel says that number represents total debt in the household sector — both  mortgage and nonmortgage debt combined. “It peaked at the beginning of the  financial crisis at 123 percent. Normal, back 10 to 15 years ago, was somewhere  south of 80 percent,” he says.

So what do low interest rates do?

In normal times, low interest rates might nudge consumers to borrow money,  but the Federal Reserve intends to stimulate the economy by helping homeowners  refinance their existing mortgages.
The most recent actions by the central bank — the announcement of the third  round of quantitative easing, or QE3 — pushed mortgage rates to new lows. If  many people can refinance their mortgages, that will free up some household  income that can then be spent or invested.
“That is sort of how the Fed policy of keeping rates low will stimulate the  economy: by increasing the disposable income of households through refinancing.  And also by keeping interest rates low, it will make it easier for households to  buy new houses, which will stimulate the construction sector slightly,” says  Hampel.
But refinancing isn’t taking on new debt; it’s just repackaging debt that’s  already on the books, so to speak. The real rush to borrow money may only come  just before the sale ends, about three years from now.

Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value Advisors (UVA), Reno, NV, a Registered Investment Advisor. Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the Investment Committee.

Information cited has been compiled from various sources which UVA believes to be accurate and credible but makes no guarantee as to its accuracy. A more detailed description of the company, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521.

Ph: (775) 284-7778.


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