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November 06, 2008

Is a change in consumer culture coming?

Some observers of the economic and financial scene think we may be in the middle of a major change in how consumers view their income and spending. What changes are expected?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, I think it would be fair to say that for the last several years, we've been a borrowing culture. Now, this was not based on, really, throwing thrift out the window. It was simply based on incentives. When you have low interest rates like we had earlier this decade and when the value of your assets - like your home, your stock portfolio - is rising, then borrowing makes sense, and saving doesn't make sense. And of course, as a nation, we did a lot of borrowing, and we did very little saving. Now, those economic fundamentals have changed. Interest rates are higher, and of course, most people know, unfortunately, that asset values, many asset values, are going down. Housing values are going down in many places. The stock market's going down. And so what this environment does is make borrowing more expensive and makes saving more likely and more of a normal thing to do. So if these conditions are maintained, I would expect to see a whole change in our culture of how we view borrowing and saving. People are still going to borrow, but I don't think they're going to go on the borrowing sprees that they were. And I think savings will be much more in, because people will think, well, if I want to buy that house or buy that car down the road, I can't really rely on going into my home equity because my home equity is much smaller, interest rates are much higher. I'm just going to have to save money. I'm going to have to do it the old-fashioned way. So this would obviously mean a total change in how we view personal finance. Some would say it's for the best. Some would say, well, it's just reacting to changing conditions."

Posted by Dave at November 6, 2008 08:00 AM