Thursday, September 30, 2010

The Bank of Canada repeats its warning to you: Curb your enthusiasm for debt!

You will recall the other day that I commented on the fact that the finances of most Canadian households are in abysmal shape.

It is one of the key factors that will contribute to Vancouver's status as ground zero in a monumental housing collapse.

Last Friday I said that numerous economic reports have cited that debt is out of control in this country. Canadians have saddled themselves with record mortgage debt as household liabilities are now equal to 145% of earned income. Six in ten Canadians now live paycheque to paycheque. 40% are not even trying to save money anymore because there is no money left over after daily expenses.

As faithful readers know, my number one recommendation over the past two years has been that, if you are in debt, get out of it... now!

And today Mark Carney, the Governor of the Bank of Canada - and the man who plays a large role in influencing interest rates, issued yet another warning to Canadians on just this subject.

Using particularly strong language (for the head of a Central Bank), Carney warned Canadians today to curb their enthusiasm for debt. In a midday speech to the Windsor-Essex Regional Chamber of Commerce, Carney echoed my warning about the perils of the fact that the ratio of household debt to disposable income hit 146% in the first quarter of the year, a record and a level that is closing in on that of the U.S.

"This cannot continue," the central bank chief warned, adding that while the net worth of Canadians is about six times the level of average disposable income, asset prices rise and fall but "debt endures."

Carney can see what I see.

We're in a tenuous position. Real Estate doesn't always go up. And many believe real estate is set to go down. How much it will go down depends on your particular slant. And as many of you know, my slant is 50 - 70%, minimum. And I lean heavily to the 70% minimum end.

Any kind of decline in asset prices will amplify and exacerbate this precarious Canadian debt position.

  • "House prices matter principally because of the “financial-accelerator effect.” When the value of a house rises, the owner can typically borrow against this increased equity to fund home renovations, a second house, or other goods and services. These expenditures can “accelerate” a rise in house prices, reinforcing the increase in collateral values, access to additional borrowing, and, thus, an increase in household spending. Of course, this accelerator effect can also work in reverse: a decrease in house price tends to reduce household borrowing capacity and amplify the decline in spending."

Carney also noted that,

  • "With Canadians working, but not as much as they would like, they have been borrowing. Real household credit expanded rapidly throughout the recession, in contrast to previous downturns, and has continued to grow through the recovery. Canadian households have now collectively run a net financial deficit for 37 consecutive quarters. That is, their investment in housing has outstripped their total savings for over nine straight years. In effect, households are demanding funds from the rest of the economy, rather than providing them, as had been the case through the 1960s, 1970s, 1980s and 1990s."

This focus on plunging all our eggs into home mortgages is important. With more and more of our disposable income going to monthly mortgage payments, Carney observed that household balance sheets are growing "increasingly stretched."

But what about our economy? Isn't it growing? Aren't we out of the recession with everything getting better and our paycheques growing?

Carney noted that while Canada’s recovery has been the envy of the Group of 7, but that recovery has relied on levels of consumer spending and investment in housing that are proving unsustainable.

Translation: The economy has relied on the fact we have been borrowing our asses off and plunging ourselves into record debt - courtesy of Carney's emergency level, record low, interest rates.

Carney's warning was simple and straightforward and he reduced it to 3 simple words:

"This cannot continue."

You would be wise to take heed, if you haven't already.

What's coming won't be pretty.



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  1. How sweet of the Bank of Canada. Just like telling a skag junkie "Curb your enthusiasm for skag", at the same time filling his pockets with the said substance.

  2. And I'll repeat *my* warning to Mark Carnival and the BoC: %$&@* you and your negative (real) rates - I'm buying gold!

  3. Carney takes a lot of heat from a lot of bears. I think he is a very bright mind who knows exactly what's going on. The tight rope that he has had to walk between currency, manufacturing, employment, trade balance and international economic relations has been impressive and has a lot to do with Canada's current standing in the world.

    That said there is no magic bullet. The major consequence has been the gorging of house and consumer debt and he is correct in asserting that it can't continue.

    I don't know how low and long we're going to do but it's going to be fun!!! (If you're in cash and gold ; )

  4. To add a constructive note to my original comment: he should raise the rates instead of moving his lips. If words worked, there would be no prisons.

  5. comment?

    What you are doing by raising rates is telling your biggest trading partner to go f$%k himself.



    Canada will print with all other G20 nations as more and more debt is turning sour from real-estate in the US and abroad. They have to keep banks whole otherwise we will have another credit squeeze.

    From what I have read over the year this is all planned in stages with a slow debasement of the greenback to a point where US can compete again in the export market thus bringing back manufacturing jobs. I'll bet even china is in on the game as well as the top 5% of the wealth in all countries.

    The worry for me is gold and if it really starts to climb I pray to god that it does not force the Fed to react as this is a sure sign of hourding and not real investment.

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