Living on Borrowed Money: Canadians Go Deeper Into Debt

Debt 438I always have a healthy debate about the Canadian economy with my good friend, mentor and editor John Gardiner.  John and I talk often and invariably the subject often gets on the state of the Canadian economy.  John is always adamant that the economic system we have now is unfair and should be changed.  I often scold John over his economic thoughts, telling him that Canada is a lot bigger than southwestern Ontario. We’ve got Alberta and Saskatchewan to think about.  Of course at the end of our conversations we usually laugh and talk about the way things used to be.

These are interesting economic times we’re living in because you could categorize it in some ways as the age of anticipation.  It seems everybody wants to believe that economic recovery is on its way back and jobs jobs jobs are just around the corner.  The problem is you cannot spend as much money as our respective governments have spent over the last 18 months and come out the other side of it smelling like a rose.  Something is going to happen but I still get the feeling in December 2009 nobody wants to believe that.  It’s like we’re almost willing economic recovery upon us when the vestiges of what we have been just through is not done with us yet.

In a Toronto Star article published Monday it referred to a Statistics Canada report just released that talked about some of the problems with our economic recovery.  It said that surging stock markets have pushed up Canadians net worth in the third quarter of this year but debt levels are rising as well.  According to the Statistics Canada report our household debt to income ratio is a 145%!  That report went on to say that household net worth at the present time in Canada is about $5.72 trillion dollars.   That sounds great but the only problem is that our household debt rose 1.6% from July to September and is coming in at $1.41 trillion dollars.  Trust me on this one, that’s a lot of debt.

It’s pretty tempting.  At one time in our Canadian society nobody wanted to get into debt because it was the death knell.  Everybody worked to pay for things in cash.  Of course that all changed and it was not necessarily a bad thing as cheaper credit helped the economy grow and created thousands and thousands of jobs.  When the financial meltdown came in 2008, world governments felt economic stimulus and cheap interest rates were the only way to get this global economy back on track.  So in Canada with the Bank of Canada rate at .25 of 1%, it made borrowing money the best deal ever.

This spending spree with borrowed money has been helped by an almost 10% rise in the TSX over the third quarter of this year.  That’s on top of the 19% gain in the previous three months.  It doesn’t take us back to where we were a year ago but the combination of a good market and cheap interest rates is a prescription for buying snake oil from Mr. Slaney.  At some point it has to stop or the inflation genie will get out of the bottle spoiling everything.

At the same time there is something remarkable going on in the United States.  Pres. Obama today actually scolded many of the big American banks for their bad behavior.  This was taking place at a time when some of them were about to pay back billions of dollars to the US federal government, which they had received under the TARP (Troubled Asset Relief Program) program.   Some analysts say that these banks are paying back the US federal government just so they can give out huge bonuses again.  President Obama read them the riot act.

So where does that put our Canadian economy?  Is there some type of correlation between all of this spending and all of this household debt in the behavior intended or otherwise of the big American banks?  Our Canadian banks hardly missed a beat as they continue with billion-dollar profits.  All of this makes me wonder.

To me, it’s all leading up to increases in interest rates maybe to double-digit levels to control a future inflation event.  So if you got a big loan to pay Mr. Slaney for that yacht in Mitchell’s Bay, hang fire when those interest rates go to 12%.  I dunno.  Analyzing the Canadian economy is never easy.  Looking ahead to 2010 doesn’t look any different.