How long to rebalance?

Date posted: October 5, 2010

Perhaps the biggest economic change today is households’ financial rebalancing. Households entered the recession with historically high debts, and now they are being forced to pay down on those debts. How long will this take? N.C. Cooperative Extension economist Mike Walden answers:

“Before I answer that … I really want to say that this is the big driving force in our economy, because if households are paying down on debts and they are saving more money — which they are doing both of those things — then they are not spending as much. And because consumer spending drives our economy — 70 percent of our economy is related to consumer spending — if the consumers aren’t spending, the economy is not going to grow very fast. And that is really why I think, fundamentally, we are in the situation we are in today.

“In terms of answering your question, we’ve got a diverse view on this. One economist recently estimated that households are halfway there. That is, they have the necessary amount by which they need to pay down their debts — they have done that 50 percent. And so this economist estimated that it would be another two or three years of households being frugal before they are finished. And, therefore, hopefully after that time the economy would grow faster.

“But another economist sees it totally differently. He estimated that households are only 10 percent done in paying down their debt. And as a consequence it’s going to take many years — probably a decade — for households to rebalance their financial sheets and get their debts down (and) their savings up. And if that is the case, then we are looking again potentially at what some economists would call the lost decade of very slow economic growth.”

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