Canadian debt: The $1.4 trillion hole we’re in - thestar.com

Canadian debt: The $1.4 trillion hole we’re in - thestar.com



Canadians’ total household debt (outstanding balances of consumer credit and residential mortgage credit) is $1.41 trillion, representing as of December 2009. Households have increasingly substituted consumption from income with consumption from credit. The share represented by revolving credit within total consumer credit grew to 77.7 per cent by the end of 2009, up from 21.1 per cent in 1989. Consumer credit had emerged as the only way many Canadians could get the goods and services they want. Because credit is so easily available. Today most of our major purchases are made on credit. Canada ranks first among a list of 20 countries of the Organization for Economic Co-Operation and Development — including the United States — when consumer debt-to-financial-assets ratios are compared.

This article is important because it shows how government monetary policies influence the economy. Interest rates have fallen low after the depression last year. Canada used monetary policy to increase consumer spending so that the economy grows. People were still afraid to borrow in the beginning of this year but as employment rates went up people had more confidence in borrowing. When real output falls short of its potential level, a recessionary gap is created. To stimulate output and increase employment, the Bank of Canada can use expansionary monetary policy. The interest rates went as low as 0.5% this year as a result consumers started purchasing more. Everyone started buying houses since mortgage rates were so low. Real output increased causing a positive effect on the economy. Therefore, now Canadian consumers are afraid of the increases in interest rates. Interest rates have now risen but this will create bit of a slow down in Canada’s economy since less people will start spending. However this also means that Canada's household debt will start to drop.