A Voice Crying In the Wilderness

My dad once told me that the prophets aren’t always guys that hear voices or dream dreams and end every sentence with “thus says the Lord.” A lot of them are just ordinary people with an extra-ordinary ability to extrapolate the future based on history and current events.

I don’t know if I qualify as a prophet but this morning while flipping through social media and email feeds this chart caught my eye and it scared the crap out of me.

debt levels

This chart was prepared by a German economist as part of a presentation he made to international investors last week. He actually dedicated 9 of his 100 plus slides to the sorry state of the Canadian economy. The overarching message to the international investment community contained in those 9 slides, almost 10% of his entire talk, which when you think about it is a huge number for such a small country, “stay away from Canada”.

I consider myself a bit of an amateur economist. I work in personal finance and study behavioural economics for fun. I’m weird. But when I see a chart like that it creeps me out because what it tells me is that Canadians are behaving badly and nobody seems to care.

Last week the Bank of Canada lowered its prime lending rate to 0.75% with all indications being that it will lower the rate again in the spring. They say it’s to encourage businesses to borrow money to spend on expansion and hiring so they can keep the economy moving forward but this is short sited thinking that might create a little near term relief but a lot of long term pain. It’s just bad math. You can’t encourage people to go deeper into debt forever and expect it to drive the economic engine.

Have you ever pure ethanol in an engine? I had a Go-cart when I was a kid. We couldn’t get it to start so I sprayed ethanol in the carburetor. It ran fast and furious for about ten seconds before it conked-out again. That’s what debt fueled growth does to an economy.

Canadian’s debt to income ratio is 164%, (the chart above is a little off), and the bank of Canada just poured ethanol on our economic engine. How much debt do they think we can carry? How high does the ratio have to go before people realize they can’t pay and will be in debt forever? With the current interest rates, if we all stopped borrowing today, just lived on our income and made nothing but minimum payments the average Canadian would be in debt for the next 35 years!

In 2008, at the height of the financial crisis the ratio was 120%. Our American friends got it, made some hard choices and their economy is now booming. Canada went the other way and we are now standing on the verge of a financial crisis of our own that will make 2008 look like a kiddie party.

Here’s the bottom line.


The interest rates are low to encourage businesses to spend but I’m afraid the temptation will be too great for many consumers and they too will mount up more debt.  Don’t do it, instead consolidate your high interest debt like credit cards onto a lower interest line of credit or roll them into your mortgage and use the cash flow you save to throw at the principle on your debt. These interest rates can’t stay for long, they are simply unsustainable, and when the interest rates go inevitably up and the defaults start happening, our entire economy will collapse. Mark my words.

When that happens, it will be the people with the lowest debt to income ratio who will not only survive, but thrive.

For more information on how to get out of debt, build wealth and leave a legacy write to themeekonomicsproject@gmail.com

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