Growing Household Debt

Americans VS Canadians on Household Debt

Consumers love to spend money. And around this time of the year big spenders tend to have a whole lot of purseonality. A report from the newyorkfed.org shows that Americans have a total of $11.7 trillion of household debt. Roughly 74% of that is mortgage debt. That’s aboot $37,000 of total debt for every man, woman, and child in the U.S.

Meanwhile, a recent report from the Equifax credit bureau reveals that Canadians now carry a total of $1.5 trillion of debt. This is 7.4% more than a year ago. And it works out to be roughly $43,200 per capita. But not to worry because if we remove the mortgage portion, then the total amount of debt has only increased 2.7% from 2013. This is actually quite sustainable, because if the inflation rate is around 2.7% and our debt increases by the same amount then the real value of our debt wouldn’t have gone up at all. 😉

It looks like Canadians are 17% more indebted than Americans. Sorry 😐 But stable growth of household debt isn’t necessarily a bad thing. In fact, it’s what’s keeping the Canadian economy competitive. Canadians have to stimulate the economy by consumer borrowing and spending. Low interest rates have encouraged people to do just that. Auto loans showed the most significant increase, at 6.8% year-over-year. This is great news for everyone! Drivers can own new cars with affordable financing. Dealers are making more money from selling more cars. The manufacturing sector is firing on all cylinders. And total economic activity increases across the country. 😉 I don’t see any problems with this picture.

A devil’s advocate may suggest that borrowing money to buy expensive cars and speculate in the hot real estate market may not be such a smart idea. But let’s not forget that personal finance is relative. Despite the increase in debt, the delinquency rate — (bills more than 90 days past due) — remains on a downward trend and now stands at just 1.1% of all loans in Canada, Equifax said. In other words people are better off with their debts today than when they had less debt in previous years. That’s because the cost of debt is what determine’s our ability to pay it back. For example I would much rather owe a bank $100 with a 2% interest rate, than owe $80 with a 10% interest rate. Assuming these loans are amortized over many years, the latter loan, despite being a lesser amount, will end up costing me more money. 😕

Creating Money Through Credit

The more debt consumers borrow the more money there will be in the economy. And who doesn’t want to live in a vibrant economy eh? 😀 Canada’s gross domestic product (economic output) increased 2.8% last quarter, beating economists’ expectations. I guarantee our GDP wouldn’t have performed so well if we didn’t borrow so much money during the same quarter. 🙂 The U.S. economy did even better growing at 3.5%, wow. 😀 This is why I chose a 35 year amortization for my mortgage instead of a shorter term; I prefer to capitalize on cheap money and hold my debts for as long as interest rates stay low.

Paying down debt destroys money, shrinks the currency supply, and hurts the economy. I refuse to let that happen. I have a moral responsibility to borrow and spend so the economy can stay strong for my fellow Canadians. It’s time to give my credit card a good workout. 😎 (image below is not my credit card)

All jokes aside though, the important thing is for us to maximize the usage of any new credit we take on. We should implement household stress testing so we don’t over extend ourselves. Equifax warned that indebtedness is expected to go even higher over the holiday shopping season. I can’t wait to see how much household debt we’ll have in 2015. 😀

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Random Useless Fact:
A Wake Forest University study found that the left side of peoples’ faces are perceived and rated as more aesthetically pleasing than the right. It is theorized that we present a greater intensity of emotion on the left side of our faces. Perhaps this is something to consider when taking your next portrait photographs.