6:   Debt Rising

David Gracey

A new report from CIBC World Markets (not available to the public) gives cause for alarm. Household debt rose 7% last year (20% over the past decade) and now stands at 110% of disposable income. Debt has been rising faster than assets despite the run-up in home prices.

Interest payments on the debt are about 8% of disposable income. However about 40% of Canadians have little or no debt, and they hold about $40 billion in cash. This means that the debtors must spend an average of 14% of their disposable income on interest. When we add in the interest paid on corporate and government debt, the burden rises much higher. And it is constantly increasing.

The CIBC report says this is no big deal as long as interest rates stay low and there is no recession. The problem, apparently, is not excessive credit, but a lack of income growth which is attributed to a "significant drop in the quality of employment in the Canadian labour market over the past 20 years." There is however no indication that trend is about to change. In fact, given free trade, outsourcing, etc., it seems likely to get worse.

As the report makes clear, but never overtly recognizes, most of the credit and debt is coming from the banks. They of course must put the blame on workers who borrow to try to maintain their standard of living. But what if these workers stopped borrowing? Where would the money come from then?

The simple truth is that we have so structured our monetary system that a large proportion of the population must assume ever increasing debt. As a society we must take on even more debt if the economy is to grow. But this trend is unsustainable. There is a limit to the amount of interest people can pay. Itís a crazy way to run an economy and the day of reckoning must come.

David Gracey

-- from Economic Reform, March 2005