The CD Howe Institute published a commentary paper earlier this month entitled; The Rise in Consumer Credit and Bankruptcy: Cause for Concern? A full copy of the report can be downloaded by clicking here: CD Howe 04-2012 Commentary_346
The study tackles four questions related to the current trend in consumer borrowing:
- How have consumer credit and personal bankruptcies changed since the 1970’s?
- What are the main factors driving the dramatic rise in bankruptcies and unsecured borrowing?
- What is the vulnerability of Canadians to higher interest rates or unemployment?
- Is there a need for major changes in credit market regulation?
It’s interesting to note that along with consumer debt levels increasing by a factor of more than five in the last 30 years, consumer credit is only approximately half as large as total mortgage debt, however the interest on consumer debt represents roughly 45% of total household interest payment due to substantially higher average interest rates.
Although the report indicates that current debt levels are ‘likely’ sustainable the word ‘likely’ is not much of a confidence booster. Betting ones financial future on a scenario deemed 'likely' I would deem to be similarly akin to odds slightly better than a coin toss.
Canadian lenders and consumers remain vulnerable to large external economic shocks (ie. possible sovereign debt defaults in Europe or a China slowdown) triggering a domestic pullback in borrowing and consumption, when everyone suddenly loses their fragile level of confidence and wakes up to the idea and the long term value of deleveraging all at the same time, resulting in deep recession.
Like a crowd all trying to flee a burning movie theatre through the emergency exit at the same time, some will be trampled. We can all make the conscious decision now to begin the deleveraging process to be better prepared when the inevitable does happen (and if it doesn’t because somehow "this time it’s different" still realize substantial savings in debt carrying costs) or do nothing and just complain about the irresponsible Europeans or unpredictable Chinese as being the cause of our future fiscal suffering. We all have the personal freedom to choose how we're going to play this.