Frugality is the new extravagance, according to report from Reuters (also picked up by Mish Shedlock on his Economic Trends and Analysis blog).

After years of living large, US households are finally learning what financial experts thought they never would: to live within their means.

Economists have long warned that the U.S. consumer was on an unsustainable spending frenzy and that savings rates were dangerously low. Now, families are being forced into financial responsibility by the housing downturn and a weakening economy.

“For many years people on all Street have refused to believe that American consumers could ever change their spending habits,” said David Rosenberg, North American economist at Merrill Lynch. “But it’s happening.”

Consumer spending accounts for 70% of the US economy, 30 percent of that is discretionary spending — that is, buying stuff you can live without.

“Our government is forced to look into the mirror and create a magical image by reassuring the American people that everything is just fine with the economy, when it’s really not,” says Richard Benson.

“When the government releases economic statistics for prices and employment, a magic mirror is used to make numbers look much better than they really are. Both the Democrats and Republicans use this smoky mirror when they control the Presidency, and neither party dares to glance into it in fear it may shatter from the reflection. Washington is a company town and a political machine that spends trillions of our tax dollars to mislead the public.”