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The fuse has been lit on Canada’s debt bomb
October 3, 2018
6:15 am
Top It Up
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From Gary Mason, in the Globe and Mail -

The fuse has been lit on Canada’s debt bomb

We’re not talking about the individual indebtedness of Canadians, which is frightening enough. At the end of last year, households in the country were more than $2-trillion in arrears. Put another way: The typical Canadian owes about $1.70 for every dollar of their income. It’s a number that keeps Bank of Canada officials awake at night. But people yawn when you mention debt levels. It’s a problem for another day.

Maybe. But we’ve never seen debt levels like the ones people are carrying today. And still, they’re nothing compared with the liabilities most Canadian provinces are staring at.

[…]

Any way you look at it, there is a huge financial reckoning on the horizon, and a lot of people aren’t going to enjoy what that looks like. The public doesn’t like to hear the word “no.” And politicians don’t like using it, because they know voters are listening. But society better brace for it, because soon there will be no other option.

Current spending levels are not viable – a fact that has been evident for some time. We will soon have to start living within our means – as unpalatable as that might be for many.

https://www.theglobeandmail.com/opinion/article-the-fuse-has-been-lit-on-canadas-debt-bomb/

October 3, 2018
7:01 am
Pipersierra
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Does this mean the banks will be hit hard or will they shake it off and someone else ends up holding the bag? How does one invest in a situation like this?

October 3, 2018
7:05 am
Kidd
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I full heartedly agree with the above post, which kinda means... no one else here in his forum will.

It's the reason i've mentioned before.... Canadian dollar below 60 cents. Negative BOC rates because your government needs the trillions of dollars we old folks have in savings.

10 have NOT provinces in canada can not be good... added note: canada only has 10 provinces, so we are batting 1,000. Hey, speaking of sports, here's some good news, the price of toronto maple leaf tickets have ONLY gone up 14% from last season.

October 3, 2018
7:42 am
canadian.100
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Some of us have seen this scenario previously. Liberal governments love to spend promising the moon to everyone, disregard balancing their budgets and run up huge deficits and accumulated debt, which only is being passed on to future generations to deal with. That's when Canadians get fed up with all this debt, and hold their nose and vote Conservatives in because they know that Conservatives do have a better record when it comes to managing finances, being more fiscally responsible in their spending and attempting to balance their budgets.

October 4, 2018
8:09 am
Norman1
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There's no real issue. I don't think the Globe & Mail article accurately reports what the PBO report says.

The summary of the Parliamentary Budget Officer's September report Fiscal Sustainability Report 2018 says this:

Total general government sector

From the perspective of the government sector as a whole (that is, federal and subnational governments and public pension plans combined), current fiscal policy in Canada is sustainable over the long term. Relative to the size of the Canadian economy, total government net debt is projected to remain below its current level over the long term. …

One can come to some really far out conclusions if one reads just part of a report.

A solution I see is for the federal government to reduce its taxes and the provinces to increase their taxes. We taxpayers end up paying about the same as we do now and the country continues as it is now.

October 4, 2018
8:24 am
Top It Up
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I ascribe to the view as posited in Forbes -

Politicians do not enjoy spending funds on debt payments as it produces no photo ops and no grateful voters. Yet without quick and significant action on the federal budget, as soon as interest rates begin to rise toward normal the burden of the national debt on the federal budget will become heavy indeed. Something will have to give.

Measuring the national debt as a percent of GDP may be a common international norm, but it makes little sense since not all national income is collected in taxes. Looking at debt to government tax revenue, more akin to a family’s comparison of its debt to its income, the story of our national debt becomes much scarier.

October 4, 2018
7:13 pm
Bill
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I don't see the big deal. If your income is $50K a year, at $1.70 mentioned above your debt is $85K (on an average basis). Seems manageable to me.

October 5, 2018
4:38 am
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Bill, that's a 1-year snapshot you're looking at - what about the cumulative after many years of habituated overspending?

Here's what MY last credit card statement had to say about debt -

Reminder: If you only make the minimum payment every month, it will take approximately 30 year(s) and 5 month(s) to pay the entire new balance shown on this statement.

October 5, 2018
7:40 am
Bill
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The article says: "The typical Canadian owes about $1.70 for every dollar of their income." So I read that to say that as of today every Canadian owes $1.70 for every dollar of her annual income.

Top It Up, are you saying the way to read it is that for every dollar of income (they've ever made) that Canadians went out and spent $1.70? That would be alarming.

I've never seen anyone clarify what that phrase means, no media folks ask the person saying it - everyone just assumes we know, and I for one don't.

October 5, 2018
7:55 am
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Bill, after going over and over this, I believe YOU are correct in your interpretation and I am wrong.

October 6, 2018
10:10 am
Vatox
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Your total debt compared to your income

This is the debt to income calculation Statistics Canada uses to come up with that scary 153 per cent figure. Take your total debts, home loan, car loan, line of credit and credit card debt. Calculate how much money you would need to say “I’m debt free!”

Take that number (total debt) and divide it by your total annual household earnings after taxes (total income) and multiply it by 100.

Experts will say, if that number is under 130 per cent you are in good shape. 130-140 per cent you are in a vulnerable position. More than 140 per cent is getting close to the danger zone and more than 150 per cent means you’re operating at a debt level that would be hard to handle if interest rates were to rise 2-3 per cent.

170% is very bad.

October 6, 2018
12:06 pm
Bill
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Vatox, if I understand you right your first sentence is really "Your total debt compared to your annual household income net of taxes", correct?

If so, if your annual household income net of taxes is $50K then total debt level of $85K is very bad, according to the experts.

Note, if interest rates are 2% and they go to 4%, your interest costs have doubled. If interest rates are 6% and they go to 8% then your interest costs have gone up only by 33%.

October 6, 2018
12:08 pm
Norman1
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Bill said

I've never seen anyone clarify what that phrase means, no media folks ask the person saying it - everyone just assumes we know, and I for one don't.  

Bank of Canada Governor Stephen Poloz sheds light on that in the following, from Canada’s Economy and Household Debt: How Big Is the Problem? (May 2018):

How did we get here?

Two trillion dollars of debt is a big number. Let us try to put some context around it. A common way to measure household debt is to compare it with the amount of disposable income people have. In Canada’s case, household debt is around 170 per cent of disposable income. In other words, the average Canadian owes about $1.70 for every dollar of income he or she earns per year, after taxes.

October 6, 2018
12:17 pm
Vatox
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Bill said
Vatox, if I understand you right your first sentence is really "Your total debt compared to your annual household income net of taxes", correct?

If so, if your annual household income net of taxes is $50K then total debt level of $85K is very bad, according to the experts.

Note, if interest rates are 2% and they go to 4%, your interest costs have doubled. If interest rates are 6% and they go to 8% then your interest costs have gone up only by 33%.  

It's not annual debt, it's all debt. That means it's the value of debts. Here is the full article, which is from 2012 and the debt loads were a little lower at 153%
https://www.ratesupermarket.ca/blog/my-debt-to-income-ratio-is-higher-than-153-but-thats-okay/

October 6, 2018
12:31 pm
Bill
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Vatox, I didn't say annual debt, I wrote "total debt".

Guess I don't see the big deal if you net $50K/yr after taxes and your total accumulated debt is at $85K. Now if interest rates were 10% vs 3%, that might make a difference.

October 6, 2018
12:36 pm
Kidd
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I must weigh in on this.

When stats canada say... Canadians owe $1.70 for every $1 earned. It encompasses all personal debt, mortgage, auto, credit card, etc BUT it also averages in, all of those who have no, 0 (zero) debt. So the debt level for those in debt is far worse than the $1.70 quoted. The real debt level may be closer to $3 than $2 for every $1 earned. Add to that... government debt, federal, provincial and municipal. Now we're talking debt.

Canada has approximately 28 ~ 29 million people over the age of 19. So i alone paid $160 for trudea's pipe line dream. I paid $85 for the closure of Oakville's gas plant. It's a good thing money grows on trees.

https://business.financialpost.com/news/economy/statistics-canada-reports-household-debt-to-income-ratio-edges-lower

October 6, 2018
12:55 pm
Vatox
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Another way to look at it, is, Canadians owe over $2 trillion and if the total annual income of Canadian households was the same(it's not), the debt ratio would be 100%. 20 years ago it was actually 100%

October 6, 2018
1:09 pm
Kidd
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Average Canadian income $51,000

https://careers.workopolis.com/advice/how-much-money-are-we-earning-the-average-canadian-wages-right-now/

28 to 29 million canadians over 19 years old

https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1710000501

So 28.5 million times $51,000 equals 1.45 trillion dollars.

October 6, 2018
1:14 pm
Bill
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Kidd, totally agree, debt is a massive issue for many of those in debt. But many folks are not in debt (e.g. about 50% graduate from university/college with no debt, though the media focuses on the high levels of student debt), so the trick will be, as it always has been in history, how to grab any savings to try to offset the debt (e.g. in 1920's Germany hyperinflation wiped out paper savings, other ways are via bond defaults, depositors' losses when institutions fail, and so on).

Younger voters too seem to continue Canadians' preference for political parties that spend recklessly so at least it's not just the older folks alone who will be to blame when it hits the fan.

October 6, 2018
1:31 pm
Top It Up
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From the BoC link provided earlier - just when people should be tidying up their financial affairs, they instead seem to be diving deeper - note the rise in mortgage usage in the 55-64 demographic -

...Canadians, regardless of their age group, are increasingly relying on mortgages. Among people under 35 years old, the percentage of homeowners with a mortgage has edged higher from about 85 per cent in 1999 to 90 per cent in 2016. For people in the 55 to 64 age bracket, the increase was more dramatic—from 34 per cent to 46 per cent. This casts a new light on that 170 per cent debt-to-income ratio I cited before.

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