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September 17, 2008

Are we in the midst of a great unwinding?

There's no question we're in some challenging economic times today. Some call it a slowdown, while others say it's a recession. But many go further and think the country is in the middle of a fundamental economic shift. What might it be? Listen

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

"If it's occurring, some have dubbed this shift the great unwinding, and what they mean is that if you look back over recent years, you find - and this is no news to most people - you find that many people took on a lot of debt. They borrowed a lot of money to buy homes. They put a lot of debt on their credit cards. And in some sense, this made sense, because, for example, interest rates were very, very low, so it actually made sense to borrow money. Secondly, if you look at buying homes, what was happening to home prices? Well, they were going up, and up, and up. So people thought, hey, borrowing money to buy a house when that asset value's going up, again, that made sense. So I don't want to create the impression people were making bad choices. They were, probably, most people making good choices given the economic environment. But now of course, things have changed. Interest rates aren't at those basement low levels they were a few years ago. Of course, everyone knows about the housing market, and prices on many markets are going down. And so now many economists think that there's this shift going on in the economy where people are going to shy away from taking on new debt and actually they're going to start saving more out of their paycheck. It used to be they were relying on their home to provide their savings. And so, if this is occurring and if it's going to last, we could be looking down the road at a much greater consolidation of debt, lower debt loads and a much bigger increase in the savings rate."

Posted by Dave at September 17, 2008 08:00 AM