Productivity and Debt Levels: The Bank of Canada Weighs In

Productivty Debt LevelsI recently talked to a teacher who told me he was going to teach a unit on the Great Depression and compare that to the financial meltdown in 2008.  I thought that this was a good comparison because it would bring history to life for these young high school students.  In 2008 when Lehman Brothers vaporized over a weekend and the American government was forced to support many banks and mortgage companies, it crossed my mind a Canadian economic apocalypse might be upon us.

I was out in a soybean field that day and I was honestly thinking about defaults by the five major grain companies in North America.  I was imagining not getting paid because nobody had any money.  I even thought that if these American banks could go, how strong were the Canadian banks and could they go too.  I also remember thinking that if I owed the bank a lot of money it didn’t really matter what happened to them.

Some of you might think that I was overreacting to those times.  However, I’m being honest here and that is exactly the way I thought when Lehman Brothers went down and the whole subprime mortgage thing rained down on everybody.  At the time I was mainly grasping for straws when I told readers that I thought maybe our economic times would get better in late 2010. At the time I thought it would take that much time just to get us back to economic good times again.  Now that we are here, times are better by we are still nowhere near where we should be on the economic front.

So when I listened to Bank of Canada Governor Mark Carney’s comments the other day regarding a softening of the Canadian economy I was shaking my head.  The Bank of Canada announced that the Canadian economy’s anticipated annual growth was only 1.6% for the three-month period ending September 30th.   This was a big change from the 2.8%, which had been predicted earlier.  Meanwhile, our American friends saw the US economy expand at 2.3% in the same time period.  This is a lot like a tractor under load lugging under the pressure.  Bank of Canada Gov. Mark Carney also reiterated Canada’s problems with productivity and the expanding growth in household debt among many Canadians.  An economist with the TD bank, recently stated about 6.5% of Canadian households pay as much as 40% of their income to service debt.  Interest rates increases would obviously put them at risk.

Carney faces a tough task with the Canadian economy.  He knows to curb Canadians appetite for debt higher interest rates are the ticket.  The problem with that is it will only make the loonie go higher and with enough already currency wars in this world that result is not the most palatable.  Despite that, he probably knows that higher interest rates are coming which won’t be so good for those families and Canadian businesses as well.

Meanwhile, since that time when I stood in the soybean field considering the economic apocalypse, Canadian agriculture minus the livestock sector has done reasonably well.  In fact it is probably a good news story amid all the different economic sectors.  One similarity between the non-farm Canadian economy and the agricultural sector are debt levels.  While the Bank of Canada Gov. is chastising Canadians for taking on too much debt, I’m sure it is the same way in Canadian farm country.  With a prolonged time of historically low interest rates the level of farm debt has become comfortable.  In other words it’s much easier to carry more and more debt than it once was.  We don’t have a zero interest rate policy in this country, but it’s the cheapest it’s ever been and that is certainly changed the debt optics in farm country.  I can just hear those cash registers ringing in farm dealerships across the Corn Belt once the bin door is slammed shut this harvest season.

Do I think that is a bad thing?  Not necessarily, because it simply might represent a good opportunity at times when cash flow is healthy and interest rates are still very low.  What I do have a hard time with is coming to grips with the generally unhealthy nature of our non-farm economy versus where we are in agriculture.  When I see Bank of Canada Gov. Mark Carney harangue Canadians about debt levels and productivity I take it seriously.  He is certainly including Canadian farmers in his crosshairs.

So is a Canadian economic apocalypse about to happen?  I don’t think so.  However, it’s pretty clear with our government’s rising deficit and our stuttering non-farm Canadian economy a reckoning is coming on the interest rate front.  Sure, those currency wars we talked about recently will affect that.  The challenge for Canadian farmers will be to manage their debt carefully in these times.  Somebody recently told me if interest rates went to 10% again Canadian agriculture couldn’t take it.  They obviously don’t know Canadian farmers.  We can take it.  It just would be one heck of a jolt.