Canadian Do Some Crazy Spending

StopspendingHow about buying a boat?  I don’t mean a little boat to puddle around and catch a few fish with; I want a big boat to take my friends and maybe an overnight excursion somewhere on the Great Lakes.  In 2010, all you need is a little bit of equity and I should be able to get credit somewhere.  At the end of the day with very low-interest rates I’m sure hoping I can make the payments.  Just think of the fun I’ll have.

Of course all of you know that I am just kidding.  I’m the guy that has trouble spending a few extra bucks on something that I might like.  For many in our Canadian society extra curricular spending is surely part of our 2010 lexicon.  We have become so used to low interest rates that almost anything is within our grasp as long as we were able to keep our job throughout this past recession.

Increasingly it is becoming obvious that this type of behavior is worrying to Canadian central bankers.  Mark Carney, the Bank of Canada Gov. has been extolling his concerns recently about Canadian debt levels rising higher than their incomes.  I believe Mr. Kearney is doing this because he realizes that interest rates will not stay low forever.  Inevitably interest rates will rise and servicing large debts will become much more difficult.  Too many Canadians have gone overboard and may get into trouble; jobs will be lost as well as economic growth.

I found Mark Carney’s comments extremely interesting when he spoke last week to the Economic club of Canada in Toronto.   He was talking about the financial meltdown in 2008 and the fiscal stimulus that seemed to take place in almost every Western country.  Of course it is his job to steer the economy in the proper direction and it’s completely obvious that will not be with low interest rates forever and ever.

In his speech to the economic club of Toronto he mentioned the risks inherent with low interest rates over an extended time.  The following are some direct quotes.

“Experience suggests that prolonged periods of unusually low rates can cloud assessments of financial risks.” “Low rates today do not necessarily mean low rates tomorrow. Risk reversals when they happen can be fierce: The greater the complacency, the more brutal the reckoning. Mark Carney, Bank of Canada Governor.

Mr. Carney’s politically correct language is code for this.  Low interest rates sometimes make people do some crazy spending, which they really can’t afford.  So the central bank has watched on the sidelines as Canada’s Minister of Finance has asked for tightened mortgage rules.  This is always helpful in preventing Canadians institutionally from borrowing more money than they need.  In fact on almost every single interview that Finance Minister Jim Flaherty has done you can hear the concern in his voice about high Canadian debt levels.

I have been aware of this problem in the Canadian economy for quite some time.  I think we grew a bit smug in 2008 when our American friends went into a deep recession than we did.  The unemployment rate remains higher than ours but at the same time it seemed Americans realized the gravity of their debt situation.  Americans cut back their spending and Canadians did not.

This was brought home to me when I read statistics Canada’s report on the ratio of household debt to disposable income in Canada versus the United States.  In Canada it rose to 148.1% in the third quarter topping the American percent of 147.2, which was measured by the US Federal Reserve.  This was the first time in a decade the Canadian figure was higher than the US.  In other words, Canadians are spending even more freely than our US friends.  If interest rates go up someday, it’ll be brutal on this side of the border.

Whether that happens, I don’t know.  I’ve written about agricultural economics for over 25 years now.  Through that time I have seen many predictions of the Apocalypse.  Sure the 2008 financial meltdown was a big one, in fact, one of the biggest.  So maybe we have something to worry about.    With regard to this Canadian debt level problem, it’s pretty basic.  As Canadians we need to get a hold of our spending.  If you want that boat like I was musing about, it might be prudent to save the money up to buy it.  At least if you do it that way, Mark Carney’s predictions of higher interest rates won’t put you out in the snow.

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