Lower Rates Send A Flood Of Cash Into The Economy...

It's bonanza time for borrowers. Although the economy is still stalled, lower rates are starting to put big bucks into the pockets of homeowners, businesses, and even governments. Calculations by business week and others show that the current level of interest rates could add about $27 billion to the economy in 1992 (table). That's more money than most tax-cutting schemes now talked about in Washington.

The biggest winners from lower rates, of course, are homeowners. Since last summer, the interest rate on one-year Treasury bills, to which many adjustable-rate mortgages are pegged, has fallen by two percentage points. Fixed-rate mortgages, too, have fallen, leading to a tidal wave of refinancings. Borrowers could see their housing costs fall by some $22 billion in 1992, estimates Richard W. Peach, an economist at the Mortgage Bankers Assn. Other estimates for the potential cost savings range as high as $40 billion.

Companies stand to gain plenty, too. Right now, corporate bond rates are at their lowest point in 14 years, leading to a record pace of bond issues. Mther companies are refinancing old debt. John Lonski, senior economist at Moody's Investors Services Inc., calculates that at current interest rates, $92 billion of investment-grade bonds are worth refinancing. Based on past experience, the fall in interest rates since last summer could save corporations $10 billion, which could give a nice boost to profits.

Even deficit-ridden governments, big borrowers in the 1980s, are cashing in on the fall in interest rates. Kathleen Stephansen, an economist at Donaldson, Lufkin & Jenrette Securities Corp., estimates that federal debt service will be $7 billion lower in 1992 because of falling rates. State and local governments, too, will benefit, though lower credit ratings will limit the gains.

All of this money doesn't just fall out of the sky. Lower rates do help stimulate economic activity. But at least initially, much of the gain to borrowers is being financed by smaller interest payments to foreign investors and U.S. households with savings. The loss of interest income to savers will total about $15 billion in 1992. Hardest hit are people with fat savings accounts but no mortgages--the elderly, in most cases. In effect, the interest-rate cuts are redistributing income from the old to the middle-aged and young.

Many economists argue that this transfer is beneficial to the economy, at least in the short run. "The people who have the adjustable-rate debt are more on the edge in terms of their finances," says Mark Zandi of Regional Financial Associates Inc. That means they are more likely to spend their gains from lower rates--and that could help get the economy going again.

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