Haven’t even started your Christmas shopping yet? Maybe you should just take a pass on it this year. Bank of Canada Governor Mark Carney has given you the perfect out: we’ve already got too much household debt.
Retailers may not be amused by the timing of Carney’s latest pronouncements, but they needn’t worry, as most of us aren’t paying attention. We continue to spend, spend, spend … on credit.
In a speech this week, he reiterates points he and others have been making for some time, namely that we’re maintaining our middle-class lifestyles mostly through debt. While Canada is in better economic shape than other countries, we’re headed down the same road, with the same crises and austerity measures as our reward when we get to the same point as, say, Italy and Greece.
“We might appear to prosper for a while by consuming beyond our means,” Carney said Monday. “Markets may let us do so for longer than we should. But if we yield to this temptation, eventually, we, too, will face painful adjustments.”
Easy credit and low interest rates have fueled the borrowing, but it’s our spending habits that have got the better of us: bigger homes, new cars, electronic toys and so on. Our wants are limitless. Our wallets, not so much.
Worse still, our real incomes and net worth are in decline, meaning we’re borrowing just to maintain the status quo. So, even as household debt climb by 13 percentage points relative out our incomes, we had less than we did last year. Or even last quarter, as household net worth fell by 2.1 per cent in the third quarter, its second quarterly decline. Although residential real-estate assets increased, this was more than offset by the decline in the value of our investment in stocks (including mutual funds) and our pensions: the Standard and Poor’s/Toronto Stock Exchange composite index fell by more than 12 per cent during the quarter. Per capita household net worth declined to $180,100 in the third quarter from $184,700, the sharpest quarterly reduction in stock prices and per capita household networth since the fourth quarter of 2008, reports Statistics Canada.More of us are getting caught between falling incomes and growing household debt, which reached an all-time high of $1.5 trillion earlier this year. Worse still, increasingly the borrowed money is being used to finance day-to-day expenses rather than consumer goodies.
This is no accident, nor is it the result of the financial crisis that began with the meltdowns of 2008, as the middle class has been under assault for more than three decades. The recession and “recovery” that followed collapse caused by the financial services industry is indicative of the trend: corporate profits and executive bonuses quickly bounced back, while unemployment remains high and those with jobs work longer and harder to tread water.
In his speech, Carney notes the corporations have been sitting on those profits, hording cash or speculating in the markets rather than investing in real economic activity that would create jobs and get the economy back on track.
Greater productivity and a concerted effort to seek customers in emerging markets would do wonders for the Canadian economy – and, ultimately, the global situation – if only firms would do something useful.
“This would be good for Canadian companies and good for Canada,” he says. “A virtuous circle of increased investment and increased productivity would increase the debt-carrying capacity of all, through higher wages, greater profits and higher government revenues. This should be our common focus.”
That’s mostly wishful thinking, however, as governments have done nothing to encourage that kind of behaviour. Just the opposite, in fact, given the emphasis on corporate tax reductions, deregulation, mobile capital and a host of other measures that have reduced corporate accountability. Those who call for tax policies to prompt companies to spend accordingly – taxing at a much higher rate profits not put back into productive use, for instance – have been dismissed by the business lobby, which continues to exercise tremendous influence despite the self-made crises.
This kind of bad behaviour is nothing new. Look at the history of automation and productivity gains in industry. They were supposed to bring us a higher standard of living and more leisure time. Instead we got neither. In fact, just the opposite happened. Corporations did in fact make larger profits, but the money was shuffled into the hands of a few and into dubious financial transactions. At first, workers in Canada, the U.S. and other advanced economies were displaced by the productivity gains. Real wages fell as unemployment levels rose, putting more downward pressure on incomes due to the competitive job market. Later, of course, more of the jobs were transferred offshore to low-wage countries, a trend that continues today. The result? More profits, with almost all of the gains concentrated in a few hands.
Governments routinely aid and abet the shift. That the likes of Carney and some of his European counterparts are making even low-key mention of the inequities means those who’ve created the lower standard of living are taking note of the social unrest that’s starting to bubble to the surface.
In an economy based on consumerism – a problem in its own right – debt-based spending is unsustainable, as is a shrinking middle class. In the short term, heading out to the mall with your shopping list provides an economic boost. In the long run, we may have to curb our enthusiasm … at least until the bills that will arrive in the New Year have been paid off.