Sunday, June 6, 2010

De-leveraging ourselves....part 1 of 4 or maybe 5

The above chart is in response to a certain reader who said:

Fish do you really think a 0.5% rate environment really changes how much debt people are going to take on?

I don't think so it is a fact, and there is lots of data out there to back it up.

The above chart is one of these, which is particularly useful because it compares us to the USA and UK.

All the Central Banks started cutting rates aggressively in the last three years, the Fed went first, then the Bank of England and then in 2008, early 2009 the Bank of Canada slashed rates in a complete panic. What do you see?

The UK and USA which were in deep doo-doo, and even with lower rates their consumers pulled their horns in. Despite the Central Bankers begging them to borrow and spend, they could see the terrible state of the economy and started getting their debt house in order. Borrowing dropped as a % of household income.

Meanwhile what happened in Canada??

We were in pretty good shape. But our consumers could see the carnage that was going on in the US and UK, and so they were just starting to follow the consumers in those countries in trimming debt.

BANG! The Bank of Canada starts cutting and they start piling on more debt, at the fastest rate ever in fact.

So what is the net result of the Bank of Canada's rate cuts. Well one result is that the Canadian consumer which started off with a much lower debt/income ratio than the UK and US, has caught up- just in time for...

1) A housing slow-down
2) Higher rates
3) A double dip recession

If any of the above three happen, we will be in same mess as the US.

Thanks Mark!