The Coming Canadian Debt Calamity?

You may be in for a shock over the next few years as the well-meaning though overly generous Federal and Provincial government spending and policies come home to roost.   Canadians are borrowing money at a record rate bringing with it rapid inflation.  We are nearing the point where it is likely to tear at the very social fabric of our country.

You may be in for a shock over the next few years as the well meaning though overly generous Federal and Provincial government spending and policies come home to roost.   Canadians are borrowing money at a record rate bringing with it rapid inflation.  We are nearing the point where it is likely to tear at the very social fabric of our country.

According to a detailed piece by Canada’s MacLean’s magazine, Canada Mortgage and Housing Corporation (CMHC) policies, rather than foreign investors, are contributing to massive housing price increases in Ontario and BC’s lower mainland.  McLean identifies a moral hazard with the CMHC loan guarantees allowing banks to engage in riskless, irresponsible lending.

While his specific analysis is sound, a good case can be made for other causes.   Additional candidate contributors include:

• low interest rates encouraging debt finance,
• Increased personal, provincial and federal debt,
• the recent slowdown in the resource market,
• wage stagnation in all but the technology sector, and
• current immigration/refugee policy.

While many of these our out of our personal control, having a better understanding of some these factors can allow you to weather “the perfect storm” they form that may change Canada as we know it over the next decade.

The High Cost of Low Interest Rates

Government leadership gets thrown out when the economy drags.  So they do, whatever they have to do in the relative short term, to keep things rolling along.  One of the ways politicians have protected themselves and their western economies from recession is maintaining low interest rates.  These low rates spur consumer spending.  This helps mature economies maintain their (still) relatively high labor rates and keep the economic wheels turning.  This in turn helps Federal and Provincial governments keep up with their global debt payments from the taxation a strong economy generates.  But, the cycle hasn’t ended and we’re not facing the high costs of low interest rates.As the government sees it,  if someone is working, they are part of the solution – helping the economy in a number of ways – not the least of which is paying taxes which helps the maintain payments on massively growing government debt.  Consequently, they set a low interest rate to free up cash so the everyday worker is able to spend it on goods and services rather than to service debt.

But the average family still cannot spend a nation out of economic crisis. However, government bureaucracy and spending can grows and grows.  You will hear with strong economic truth that a nation’s budget is not like your household budget.  However, one only needs to study the history of Canada’s federal debt at the Fraser Institute to know a 1500% increase since the mid 70’s is not just unsustainable; it’s unprecedented.

Historically, governments print more money to finance their efforts and cover the ever increasing interest payments.  Overy time this the inflation – which you can hedge against if you own a lot of real estate in Toronto or Vancouver – will greatly reduce the buying power of savings and investments the other 95% of Canadians without substantial real estate holdings.

At a certain point it all breaks down.  When rates finally return and housing costs and rents increase in major centers, you see nationwide what is already happening in Toronto and Vancouver. Housing has become unaffordable for regular working people who move further from and commute longer to  work.  These trips consume the little discretionary time and income they have. Workers can decide to opt out fully as thoughts form like, “If I’m going to have to slave 12 or more hours a day commuting and working with nothing to show for it…I might as well quit, still be broke, but at least have my time back.”

The government initially instituted the policies in order to protect workers who they saw as part of the solution long term.  However, the result is citizens that become a liability to the system rather than an asset, as health care, OAS and welfare costs remain without offsetting taxation revenue or significant consumer spending.  And on top of it all, they’re angry.  They feel like failures, abandoned by the system that many of them have spent decades working to support.  For too many, this can lead to a host of other behavioral challenges such as gambling, drug (Canadian’s are now the world’s 2nd highest users of opiates) and alcohol abuse that costs the system and Canadian families further.

The High Cost of High Tech

The situation is compounded by the shift in the labor market to higher skilled workers as wage growth is rare and where existent–one sided.

According to Seeking Alpha, the top 40% of all earners have accrued 84% of all new income (but only 34% of new debt) since 2013.  While the numbers for Canada differ slightly, the trend is consistent.

Put simply, working class people who are not technology savvy are losing ground.  Costs are increasing rapidly, but wages are roughly what they were 20 years ago.  Not only that, borrowing costs for those with less than optimal credit histories are defying the otherwise low interest rates.  As can be see from the P2P lending firm Lending Club, costs for risky borrowers have risen as much as 6%, widening the gap between low and high-grade borrowers.

Some are even saying “Those involved in tech, software development and servicing will accumulate the majority of wealth” in the future.

This loss of working class self respect is driving record levels of suicide and (once again) drug and alcohol abuse.  It also brings inevitable backlash that is often tinged with racial animosity because many tech jobs in Canada go to foreign recruits.  Be watchful of increased racial animus and anti-immigrant sentiment being observed in other western democracies over the coming years as the Federal government expands immigration, both through letting immigrants buy their way into Canada and humanitarian initiatives.

The High Road through Low Times

In light of the challenges facing us going forward and the fact that Government never pays off old debt, we are left with the age-old question of what to do?

The reality of the situation is no one else is going to save us.

While policy may correct itself enough to ensure a fundamental safety net, that’s just not where you want to be. This means you may need to adjust your financial plans now.

Since inflation is the measure how much much less your money can buy than the year before, you’ll want to position your retirement savings into financial products likely to outpace inflation. The best way most Canadians beat inflation is to invest in stock mutual funds or funds that combine a mix of stocks and bonds (especially short term bonds so as rates increase your principal doesn’t fall).  Additionally, by focusing on large capitalization, growth stock funds with mature companies that have weathered economic cycles many times; you get the benefits of experience rather than amplify your risk with more aggressive/speculative small cap enterprises.

When thinking about the future value of the Canadian dollar, there is a built-in protection by using foreign stock funds.  Should the Canadian dollar fall, the value of your fund as buoyed as the value of the foreign currencies grow.

Even if real estate is out of reach currently, choosing investments with high liquidity (the ability to turn it quickly into cash with no or minimal cost), can allow you to respond to opportunities created before the roughly 1% of all Canadian mortgages that are in default go through the foreclosure procedure of the property’s given Provence.

Have a debt reduction plan and stick to it.  Not only will this lead to more discretionary income over time, it will increase equity in your assets.  Additionally, paying down credit cards raises the available credit of your revolving lines-of-credit helping both to improve your credit score (reducing future costs and getting future positive lending decisions), as well as, to provide an economic buffer or cushion in case of of an uncovered peril or emergency.

Take a family inventory and set educational, entrepreneurial goals. Sometimes, if you cannot beat them, join them.  Planning camp for the next holiday?  Consider a tech camp or entrepreneurial camp should either of these fit the dreams of your minor children.

Further, participate in some local cultural exchange to create networking opportunities, as well as, to provide a protective hedge for our immigrant neighbors.

Finally, maintain contact and communication with us during these tumultuous times to stay on the right track and have the peace-of-mind needed to come out ahead.