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October 30, 2009

Outlook for paychecks

Probably the two most important economic factors for most people are whether they have a job and if so, what they get paid. Let's focus on the second factor today. What are economists seeing in the prospects for pay and pay increases next year? Listen

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

"Well, first of all, pay, as you might expect, has not been changing very much this year. In fact, nationally on average, it's gone up somewhere between 1 and 2 percent, which is not much when you factor in inflation. Economists are somewhat divided on what they see for pay for 2010. Typically, if we assume that 2010 is going to be a year of economic recovery, economic growth, typically if we look at past recessions and recoveries, pay does take jump after a recession as the job market solidifies and businesses are competing more for good workers. But this time around may be different because many economists continue to see unemployment being a big problem, big issue in 2010, nationally, perhaps staying above 8.5 percent, maybe even a little higher here in North Carolina. So the bottom line is that many economists think that we're going to see very little progress, if you will, on pay, very little increase in pay in 2010. Another reason being, workers, because the unemployment rate going to be so high are going to be willing to take less just to have a job."

Posted by Dave at 08:00 AM

October 29, 2009

Inflation worries

Some analysts keep saying that one threat to the economy is higher inflation. This worry is prompted by all the spending and money creation the government has done in the past year to fight the recession. Are we seeing any signs yet of higher inflation?

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

"No, we're not, and that's the good news. In fact, if you look at total inflation, including everything that consumers buy, it was actually negative last year. It went down by 1.5 percent. That means on average, prices fell by 1.5 percent. Now, if you do take out what economists call volatile energy and food prices - we often take those out because they can move up, but they also can move down very quickly - then we do find that we did have positive inflation as prices went up. But they went up only a little over 1 percent, about 1.4 percent. So regardless of the measure you look at, most economists don't see a threat of higher inflation right now. But experience tells us that higher inflation takes time to develop. The federal government has engaged in a lot of spending, a lot of money creation. That often will take between 18 and 24 months to show up as higher inflation. So I think the worries about higher inflation are not worries about higher inflation right now. They're worries about higher inflation in 2010 and 2011."

Posted by Dave at 08:00 AM

October 28, 2009

Dueling multipliers

There's already a debate going on about the federal spending stimulus plan designed to combat the recession. The debate is about how effective the stimulus has been. What can economists say at this point?

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

"Detractors of the stimulus point out the fact that the unemployment rate has continued to rise. In fact, we're now at nationally 9.8 percent, even though we've had a stimulus in effect since March. That's true. Supporters of the stimulus, on the other hand, say, look, the bulk of the stimulus money has yet to be spent. That's also true. We're looking at most of the stimulus money being spent in 2010 and thereafter. But in terms of economics, the real issue about the stimulus really comes down to something economists call multipliers. That is to say, for every dollar the federal government spends, how many new dollars will that result in being spent in the economy. Supporters of the stimulus say that there's a lot of evidence to show that that multiplier is over one, maybe l.5, maybe two. So the $700 billion spent by the federal government might turn into over $1 trillion. Detractors, however, can find equally well-done studies that show that the multiplier maybe is only one or perhaps even less than 1. So this really comes down in some sense to something that is going on in the halls of academia, where economists are debating, and they're trying to find empirical work to support what really is the government multiplier. If it's greater than one, then you could say the stimulus eventually will work. If it's less than one - in fact, if it's close to zero - then you might say, no, it won't work."

Posted by Dave at 08:00 AM

October 27, 2009

Social Security investments

There seems to be much discussion about what happens to contributions made to Social Security by taxpayers. Many people believe this money is immediately loaned to the federal government and replaced with IOUs. Is this true, and is it something to worry about?

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

"It is true. When the framers of Social Security developed the system back in the 1930s, what they, I think, rightly concluded is that if the system had any spare money - reserves, if you will, for the future - that money ought to be invested, not just lie around, because if you invest it, you earn some interest. Then the question became, well, what do we invest it in? And the framers wanted Social Security investments to be absolutely safe. So if you look around the investment world, actually - and many people will find this hard to believe - actually, the safest investments around are with the federal government, so-called treasury securities. So that's what Social Security is required to do by law. If they have excess funds, they have to invest them in treasury securities. That money does go to the federal government. The federal government can spend that money. That means the cash in the reserve fund of Social Security is replaced by these treasury security IOUs. But the good news is the federal government has a perfect track record, perfect, going back over 200 years of always paying its debts, paying interest on those treasury securities as well as paying the principal when it's due. So I don't think that's an issue. Now we did have a debate a couple of years ago in the country about whether we should change the investment mix of Social Security. The conclusion then was still, we ought to keep it the way it is, and, indeed, I think that will remain as is for the foreseeable future."

Posted by Dave at 08:00 AM

October 26, 2009

Social Security outlook

For the first time in 25 years, the Social Security system has had to dip into its reserve funds in order to make payments to recipients. Is this the start of a worrisome trend? Is Social Security now in trouble?

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

"It's not in trouble immediately. The fact that it had to dip into its reserve fund I think is totally due to the recession. With the recession, we have fewer people working, so contributions are down. I think those contributions will pick up when the recession's over, so I think this is probably at most a two-year problem. But, that said, Social Security certainly has a longer run problem. In fact, every year the trustees of the Social Security system report on its financial health. Right now, they are telling us that the deficits that we just saw this year and probably next year will actually become permanent beginning in 2016. That is, to make payments, Social Security will have to dip into its over $2 trillion fund. And that $2 trillion reserve fund will be depleted by 2037. So in essence, Social Security will go bust by 2037. After that, the contributions into the system, the trustees estimate, will only be able to cover three-fourths of promised benefits. So, yes, we had a little run on Social Security now, but I don't think it's a major problem. But we do have a problem looming, so better now than ever to look at Social Security to see what can be done to shore up the system."

Posted by Dave at 08:00 AM

October 23, 2009

North Carolina business costs

Forbes magazine recently ranked both states and localities in their attractiveness for new businesses. How did our state and cities do?

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

"Forbes considered a variety of factors, including business costs, regulatory environment, growth prospects and quality of life, and the good news is that North Carolina ranked fifth in the entire country, behind Virginia, Washington State, Utah and Colorado. We ranked very favorably on business costs. We also ranked very favorably on regulatory environment. The good news, however, continues because when Forbes went and looked at cities, North Carolina had six cities in the top 25; in fact, more than any other state, including Raleigh, Durham, Charlotte, Wilmington, Asheville and Winston-Salem. I think these rankings are important more than just simply to say, hey, we ranked high, because if we're looking at a very slow economy in the coming years - which most economists think is going to happen - I think businesses that are looking to expand are obviously going to look most closely at those areas that they find attractive. And here, North Carolina looks very, very good indeed."

Posted by Dave at 08:00 AM

October 22, 2009

Mortgage resets

Although there have been some recent bright signs in the housing market, concerns still linger. One of them has to do with mortgage resets. Explain what these are and why they may be an issue.

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

"A mortgage reset occurs when you have bought a house using what's called an adjustable rate mortgage - that's where the interest rate can change - and there's some time fuse on that as to when it will change . . . one year, two years, three years; they come in different varieties. And so we say that mortgage rate resets when that fuse is up, and that adjustable rate can go either up or down. And this was a big, big problem over the last five years as people took out more and more adjustable rate mortgages during the housing boom. And then when interest rates went up, their payments went up. They couldn't afford the mortgage, and they were foreclosed upon. So, big problem. The issue now is that we've got a bunch of these coming due over the next couple of years. We're not out of the woods on these mortgage resets, and so the concern that economists have is, well, will interest rates be higher in the future, in which case, we'll have these folks with adjustable rate mortgages have their interest rate go up - their payments go up - will that set off a whole new wave of foreclosures? Or will the Federal Reserve keep interest rates lower - indeed, mortgage rates have actually been coming down recently - in which case, actually that would help people. The rate may be reset to something lower. So this is something to certainly keep an eye upon. It's inter-related with unemployment because the more that people are unemployed, the more this could be a problem. So the housing market is certainly not out of the woods yet."

Posted by Dave at 08:00 AM

October 21, 2009

Income trends

Each year the Census Bureau releases a massive volume on the latest trends in income for the country. The 2009 report just came out. Give us some of the highlights.

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

"Economists like me eagerly anticipate this. It's sort of like a Christmas present in the summer because there's so much good data. This report that just came out is for 2008. Now, this is important because this is the first year of the recession. And as expected, we found that earnings went down for workers. In fact, they went down 1 percent for men. They went down 2 percent for women. Also, annual earnings fell for households in all income categories, but actually more so for middle income households than for either lower income or upper income households. A measure of income inequality did rise slightly in 2008 compared to 2007, but it was actually lower than what it had been in 2005 and 2006. And also the poverty rate nationwide did go up. Again, this is not unexpected, due to the recession. Nationwide, the poverty rate in 2007 was 12.5 percent. It rose to 13.2 percent in 2008. These are all numbers we would expect to see during a recession. We hope they will get better in the next few years."

Posted by Dave at 08:00 AM

October 20, 2009

Rent or own?

It wasn't so long ago that everyone recommended buying a home. Renting was said to be just throwing money down the drain. Now with the drop in the housing market the last two years, attitudes have changed. Can we now say that renting trumps owning?

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

"Well, I wouldn't go that far, but I think what's happened in the last two years I really think has exposed the differences between renting and owning. If you rent a place, it's what economists call pure consumption. You're renting that space. You don't have any investment stake in that space. Yes, you're paying money, but you're using the space. So I wouldn't say that it's money down the drain. If you're buying a home, you're doing two things. You're consuming, you're using that space, but it's also an investment. You worry about whether the value is going to go up. And of course, five, six, seven years ago, everyone thought housing prices would just continue to go up forever. And so they looked on owning as a great thing, because you got the space to live in plus it was a fantastic investment. Obviously, in the last two years, it's been a different story. On average, housing prices have gone down. I think for the average person, what most economists would argue, if you're going to be in a spot a short period of time - say, less than five years - it probably means you should rent. But if you're going to be in a spot for a long period of time, probably owning makes more sense, just because it gives you more control. But don't think that owning is necessarily going to be the most stable investment. We will probably see housing prices go up maybe 2 percent a year from here on out, not the 12 percent a year that they were going up a couple of years ago."

Posted by Dave at 08:00 AM

October 19, 2009

Inflation or deflation

Both inflation and deflation have been in the news recently, and it seems like analysts alternate between worrying about one or the other. Give us definitions of inflation and deflation, and tell us which is worse?

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

"If you watch financial news programs, it is amazing. One analyst will be worrying about inflation. The other analyst will be worrying about deflation. Simply put, inflation means average prices are going up. Deflation means average prices are going down. Now, both can be a problem, actually. High inflation obviously can hurt people whose wages don't keep up, think of the late 1970s, early 1980s. Also, high inflation tends to push interest rates up. For example, in the early 1980s, we had mortgage rates of about 17 percent. So it means people have a hard time borrowing money to buy things like a house or a car. On the other hand, deflation can be bad because ultimately - and we've had experience with this during the 1930s - ultimately it means wages are going to be pushed down. And also, if you have debt that's denominated in a certain dollar amount, it actually makes that debt relatively more expensive. I think the bottom line here is that economists have decided that probably what's best for most people and most parts of the economy is to have moderate levels of inflation, somewhere between 1 and 3 percent a year."

Posted by Dave at 08:00 AM

October 16, 2009

Will the debt sink us?

A couple of weeks ago, the Congressional Budget Office announced the national debt will be $2 trillion higher in 2019 than previously estimated. If this is accurate, it means the national debt will have doubled between 2009 and 2019. Will this be just too much for our economy to bear?

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

"Well, this is a source of a lot of controversy and discussion right now, and the numbers indicate that the national debt will be $14 trillion in 2019. That's the latest estimate from the Congressional Budget Office. Now, of course, these big numbers are always unfathomable to people, so what you need to look at here is the debt as a percent of the economy. That's the way economists look at this, and what will happen if these numbers are true is that the debt as a percent of the economy will grow from 63 percent of the economy to 68 percent of the economy in 2019. Now, a couple of points here. No one's ever going to be presented with the bill. It's popular to take the national debt and divide it by the number of people, and say this is what each of us owes. We're never going to get a bill. The debt can be continually refinanced, if you will, over time. The real way, in my opinion and economists' opinion, to look at the cost, for example, of additional national debt is to say, how much more is this going to cost to service that debt, the interest on that debt. And the additional interest that we will have to pay in the next 10 years on that new national debt is about $3 trillion. And the question is, is it better to spend $3 trillion that way, servicing the national debt and then all that the national debt buys, or is it better to spend $3 trillion in another way, for example, in the private sector. I think that's the essential question that our public decision makers have to answer."

Posted by Dave at 09:22 AM

October 15, 2009

Jobless recoveries

There are many positive indicators occurring in the economy now, but the job market still is not included among them. Indeed, some analysts are talking about the potential for a jobless recovery from this recession. What does this mean, and why would it occur?

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

"Well, it simply means that technically the recession's over before we start to get jobs back. This is not unusual. If you look at the last recession in 2001, it technically ended in November of 2001. We didn't see jobs start to come back until 2003, over a year later. And there are a couple of reasons for this. I think one is that when the economy starts to pick up, employers or businesses try to recover some profitability, so they try extra hard to keep their costs down. That usually means they're very stingy on labor. Secondly, I think employers want to be absolutely positively sure the economy is back before they go out and hire people. So we do tend to see a lag in the employment market from when the overall economy begins to recover. That can't go on forever, though. At some point, we have to have the labor market perk up. Again, economists think this will probably occur sometime in early 2010."

Posted by Dave at 08:00 AM

October 14, 2009

Manufacturing grows

Output in the nation's factories has increased in the last few months, so this is very good news about the economy. Do we have any evidence that the same thing is happening in North Carolina?

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

"Not directly. These data for North Carolina and states come out with a great lag, but we do have some indirect evidence. The Federal Reserve each quarter puts out something called the 'beige book,' where they actually go around and talk to people. They don't collect a lot of information. They talk to you and get anecdotal information. And in their last report, they said or they found that manufacturing in the region in which North Carolina is located - in the Southeast - has been expanding. So this is good news. This indicates that maybe things are beginning to perk up here in North Carolina, particularly in manufacturing. It's also good news because manufacturing accounts for 50 percent more of our state economy than it does of the national economy. And actually if manufacturing starts to pick up and grows stronger that should makes sense because it really gets hit hard during recessions because people can postpone buying refrigerators and furniture, anything that's durable. Then when the economy does pick up, they go back and buy those things, so we should see a rebound - a strong rebound - in manufacturing. And perhaps we have some evidence that that indeed is occurring."

Posted by Dave at 08:00 AM

October 13, 2009

Sources of growth

When people look at today's economy, one of their concerns is where the jobs will come from. Many economists expect consumer spending to be lackluster. If consumers aren't spending, who else is there?

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

"Well, there are really four sources of growth in the economy - four sources of spending. Consumers, which we've mentioned, businesses, government and then what we call net export - how much we're exporting minus how much we're importing. Clearly, there's a big issue with consumer spending. Consumer spending, of course, has dominated this decade. Consumers went into debt. They bought everything that was out there to buy. Now, they're pulling back, and a big concern among economists is, will they begin to spend more and at what rate? And probably the answer is, very slowly. Businesses, of course though, can spend. Businesses spend money to build new factories, to upgrade to buy new technology. They haven't been doing that recently, during the recession. We expect they will start to do that, so that will be some source of economic growth. Government spending, of course, accounts for over 25 percent of the economy. Government has been spending. We obviously know about the stimulus plan. That's going to continue, actually become greater in 2010. And then, net exports, and this has actually been a bright spot in our economy. Unbeknownst, I think, to most people, we have gotten our trade balance, which has been very negative in recent years, almost to a balance. And exports should grow very strongly for two reasons. One, the weak dollar and secondly as the rest of the world recovers from the recession."

Posted by Dave at 08:00 AM

October 12, 2009

Is the recession over?

Recently Fed Chairman Bernanke stated that from a technical viewpoint, the recession may very well be over. What did he mean by this, and do you agree?

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

"You can talk about, really, there being two parts to the recession, a production part and a labor part. I think what Bernanke meant was that the production part seems to be over. We've had good news, for example, on factory output, which is up. Home building is up. Inventories are down in businesses. So this means the production part is starting to get some legs, and indeed, this quarter - in the fall - we expect production overall in the economy to be up. But the labor part is another story. We're still losing jobs. In fact, in August in North Carolina, the broadest measure of the labor market showed we still lost another 8,000 jobs. So I think what's happening here is we're getting the production section perhaps going better, the employment section is lagging, and that employment section probably won't be better until sometime next year. And I think where Bernanke could have done himself a favor here is by stressing that, because most people get their news and their feelings about the economy in the job market. And certainly the job market is not well."

Posted by Dave at 08:00 AM

October 09, 2009

The rebound in wealth

We finally have some good news for household finances. The government said household wealth increased in the second quarter. Why is this important?

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

"Well, this is very important. Obviously, household wealth represents the value of what you own - your assets - minus the value of what you owe - your liabilities. And during this recession, household wealth has gone down by $13 trillion - that's "T" - trillion dollars. Now in the second quarter, we got some of that back. We gained $2 trillion, so we're now off by $11 trillion. Now this is important for several reasons. One, of course, wealth represents the cumulative savings by households. Secondly, if wealth goes up, households will feel more confident to buy and spend money, so that's good for the economy of the future. And then thirdly, it does indicate that assets are going up faster than debt is going up. In fact, debt has been going down, and we have to have that happen for American households. They have to get their debt under control. So this is probably the best piece of economic news we've had in several months."

Posted by Dave at 08:00 AM

October 08, 2009

Looking ahead

Many people who look ahead to the future economy see many problems, such as debt, energy or finding good-paying jobs. Other people see opportunities. Which do you see?

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

"Well, I actually see both, and I think many economists see both. There's no question that we have many challenging problems or issues. Of course, I challenge anyone to say when we didn't have these things, but we certainly have the ones mentioned, probably some others. But if there's one thing to say about our economy - particularly our American economy - it is that when there are problems, there will be people out there trying to find solutions, and solution seeking obviously creates opportunities. So I see and many economists see in the next 15, 20, 30 years a high level of what we would call entrepreneurial activity. Entrepreneurs are people who go out and try to find opportunities to make money. But the way to make money, I think, in many cases in the next few decades is to find solutions to these problems. So I see a lot of opportunities for new investments, new companies, new employment in areas like energy efficiency, dealing with the climate, creating healthier lives, expanding useful application of technology. So yes, there are problems. There are issues. But I think there are a lot of exciting potential opportunities also down the road."

Posted by Dave at 08:00 AM

October 07, 2009

The life cycle of borrowing and saving

There's evidence today that the recession is motivating households to borrow less and save more. While the condition of the economy may certainly affect our financial habits, are there some other fundamental factors at work too?

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

"There really are. We can really see a pattern in how people borrow and save over their lifetime. Let me present it to you. When a household is young and their income is relatively low because they're just starting out in their job, oftentimes their spending needs are very high. They may be starting out with a family. They may want to buy a house, appliances, car. So oftentimes what you see is young households will borrow. And essentially what they're doing is borrowing against their future income in order to finance those things they feel they need now. So we see borrowing rates very high among young households. Then when they get to middle age, that's usually the time of their peak earning years, and they use that time to pay off past debts as well as save for their future retirement. So savings rates tend to be highest for middle-aged households. And then you go back the other way when you get to old age, where you obviously - this is sad to say - have a limited period of time to live, we tend to see spending go up and saving go down as people live out the rest of their lives. Now, everyone is not going to follow this pattern, but it is significant enough that we see most households do fit into this life cycle of borrowing and saving."

Posted by Dave at 08:00 AM

October 06, 2009

Will housing problems persist?

There's increased optimism about the housing market as sales have been trending upward and prices seem to stabilize. But does this mean we're out of the woods as far as housing issues are concerned or are there more potential problems down the road?

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

"Well, things are looking up a little bit in the housing market. I think there's still some major issues down the road. One is what's called mortgage resets. This is for people who took out adjustable rate mortgages, and oftentimes, they took those out at very low rates. And then when they reset, they often find they reset to a higher rate, and that could spark a new round of foreclosures. And we have in the next couple of years a large number of mortgage resets coming on line, so it's going to depend upon the condition of the economy, what the level of interest rates are at that point, whether those mortgage resets will be a negative for the economy. I think another issue is appreciation, price appreciation. We have seen housing prices for virtually the first time in history on a large scale basis fall over the last two years, by some measures by anywhere between 25 to 33 percent. And most economists think that we will eventually see housing prices bottom out, but appreciation will not go back to the double digit rates that we had in the mid part of this decade but maybe to a more modest 2, 3 or 4 percent. That's going to put a continuing restraint on consumer buying."

Posted by Dave at 08:00 AM

October 05, 2009

Bernanke's reappointment

President Obama has nominated Fed Chairman Ben Bernanke to continue in that post for a second term of four years. Why is this important to anyone other than economists and folks who follow the intrigue of Washington politics?

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 the most important reason is that probably more than any other single person - and I would include the president in this - the head of the Federal Reserve, the Federal Reserve chairman, has more direct impact on our economic lives than anyone else. Ben Bernanke and all of his predecessors could affect the economy and the economy we face more so than the Congress, the president or any CEO. And this is for a number of reasons. Number one, the Federal Reserve has a lot to say about the level of interest rates, which means that impacts how much we earn on our money as well as how much we have to borrow when we go get loans. The Federal Reserve has an impact on the availability of money and credit, and as we've seen in the past year, the Federal Reserve can do a lot of things to go out there and impact the financial system. In fact, economists widely argue that Bernanke and his colleagues really did rescue the financial system in the last year. Now Bernanke's job the next four years if he is confirmed by the Senate will not be easy. Assuming the recession ends, he is going to have to unwind a lot of these policy initiatives or we're going to be faced potentially with higher inflation and higher interest rates. Also, I think there could be a clash with the Congress and the president over the federal budget and the large debt that's been generated there because Bernanke will resist having the Federal Reserve purchase that debt."

Posted by Dave at 08:00 AM

October 02, 2009

Where's the money going?

Since last fall, the Federal Reserve has poured billions of dollars into the financial system, yet loans from banks haven't increased by a comparable amount. Indeed, by some measures, loans have fallen. So, what's happened to all these dollars?

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

"Well, the technical answer to the question is that the money is sitting in bank's vaults. Banks have increasingly taken that money and they've bought safe government securities and held them. Now, I think the broader question is, well, why are banks doing that? I think there are two reasons. One, banks are still very skittish about making loans. They've tightened standards. This is a normal reaction. We see it happen during any recession, and of course, this is a very bad recession, so I think it's happened to a greater degree. And secondly, loan demand. That's economic speak, meaning people coming to a bank and wanting a loan. Loan demand is actually down because there aren't as many economic opportunities out there; also because businesses and private households are trying to pay down on their own personal debt. People haven't been going to the banks like they have in the past, wanting loans. So the combination of these two factors, the fact that banks are still skittish and the fact that people aren't wanting to borrow as much, has resulted in total loan volume going down. And it's probably going to stay that way until we see a significant fall in unemployment and a significant increase in economic growth."

Posted by Dave at 08:00 AM

October 01, 2009

The jump in the national debt

Headlines were made a couple of weeks ago when the Congressional Budget Office announced the national debt within 10 years would be $2 trillion higher than previously estimated. In 2019 the total federal debt held outside the government is projected to be $14 trillion, double today's amount. What does this all mean?

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

"Several things. Of course, people are going to look at that $14 trillion and say, wow, that's a big number. Well, one thing that we economists bring to the table is to say, let's put that in perspective. And what we typically do is look at that debt as a percent of our overall economy. And when you do that, the numbers look troubling but perhaps less troubling. That is to say that the national debt as a percent of the economy will go from 54 percent today to 68 percent in 2019. Now, it also doesn't mean that at any point in time someone's going to come to your house or your children's house and present you with a bill and say, here, pay up. We can carry this debt over into future generations. In fact, this is one debt that we don't ever have to pay off. It just has to be carried. And I think that's the real issue here, because the larger the national debt we have, the higher the interest expense on that national debt, which means there's going to be less money to spend by government for other things or the federal government will have to increase taxes. So it's really what economists call an opportunity cost. We have a higher debt, higher servicing cost on that debt, meaning less money for other things. Either that money comes from the government or it comes from your pocket and my pocket."

Posted by Dave at 08:00 AM