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March 22, 2007

Cheap money

Although interest rates are higher than they were a couple of years ago, they remain low by historical standards. N.C. State University economist Mike Walden explains why.

"I think a lot of people don't appreciate this: Money really is cheap. I think that's one reason why people are borrowing a lot of it," he says. "I think there are two reasons behind that. One is, as most people know, our economic world has expanded dramatically in the last 20 years. Countries that used to be sort of outside of our world economy -- in Asia and in Eastern Europe -- are now part of that.

"They are part of the world financial market. And many of those countries, particularly China and India, are generating a lot of money in terms of savings, and that money is available for loans.

"But secondly in order to get that money to borrowers, we have to have institutions and innovations that allow money to flow freely across the world, and we now have those," Walden concludes. "So I think the point here now is that we have a much different world financial market."

It used to be 40 years ago if you borrowed money that money may have been coming from neighbor across the street. Now it can be coming from households half a world away. And that’s allowed … interest rates to be cheaper.

Posted by deeshore at March 22, 2007 09:55 AM