Watching the Gap Grow


 

 

The Average Canadian owes $1.67 for each $1.00 of savings………..

 

Statistics Canada has just revealed that, as a country, Canada is facing a debt crisis.  No, don’t be confused.  Although the bookkeeping as it relates to National Economy is healthy, there is a much more immediate problem facing Canadians and especially Canadian families.

This news is as chilling as the recent winter storm forecasts that point out winter storm warnings and come at a time of the year when Christmas shopping becomes a priority for many – especially those with young children.

The “average” Canadian (whoever he or she is) now owes more money than they are capable of repaying.  On the average, Canadians owe $1.67 for each dollar they have available. 

When the Recession grabbed control of the economy in United States and in the UK, this same trend revealed itself and triggered the beginning of some very dark days.  If left unattended, we have defaulted payments of loans.  When sufficient numbers of those loans fall into default and when those loans are for disposable consumable goods, the loans become unsecured credit similar to what happened in the United States when Fannie Mae and Freddie Mac piled up $14 Billion dollars in unsecured debt.  Too many families in Canada and United States have been affected as a result.  Pension plans collapsed and businesses closed taking with them the jobs that families relied on.

Since most of this Canadian debt gap is for consumer goods, the largest debt holders will be the major credit card companies that are presently charging rates of 2%+ per month on unpaid balances.

This phenomenon is the product of an over-heated economy that produces a sense of false wealth.  When economic reports indicate positive future, people tend to save less and spend more.

There is always pressure from special interest groups such as Real Estate associations and the construction segment to hold the line on interest rates so as to encourage more consumption.  However, this may be the ideal time for the central bank (Bank of Canada) to deliver a long overdue increase in interest rates as they relate to savings accounts and the bond market.

Increasing yields on savings accounts and bonds would have the effect of slowing down purchases and encouraging savings.  With such incentives, that debt gap ($1.67:$1.00) could be brought back to manageable limits averting a national debt crisis. For seniors, living on fixed incomes and largely from savings accumulated, a two or three percent increase in savings yield would be a God-send.  Similarly, by improving the yield on bonds (which are secured debt) the ration of unsecured to secured debt would be less worrisome.

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