Mar 222015
 

I really like new cars. I kept on trading and trading…and I was buying a lot of gifts for people and getting more and more into debt,” says D’Arcy George who lives in Lethbridge, Alberta. Eventually his spending habits caught up to him and D’Arcy was up to $70,000 in debt and struggled with a bank account constantly in overdraft. But D’Arcy’s experience is not unique.

In a province where the average wage is over $28/hour, a sustained period of low interest rates has caused consumers to become overconfident in the economy which has led to rising consumer debt. But now that oil and gas prices have slumped some people are forced to re-examine their financial situations. :?

D’Arcy has realized this reality and has taken dramatic steps to get his debt under control. He started a second job at Costco to make more money. He now works every day of the week, often more than 12 hours a day, and he drives a used car. “I feel more confident that I can save money and know how to handle it,” he says. “I always have a balance of $8,000 in the bank and I get worried if I have less.

Canadians are getting the message when it comes to our consumer debt. A recent report from TransUnion shows the average Canadian individual owed $21,428 non-mortgage debt by the end of 2014. This number includes credit cards, lines of credit, student loans, and other types of credit products but does not include mortgages, home equity lines of credits, or margin loans.

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$21,428 is up 2.3% compared to the previous year. However digging deeper into the number we see that Lines of Credits, which make up 40% of consumer debt, has increased by 4.4%, while credit card debt has actually fallen by 2%. In other words consumers are getting smarter about where they’re borrowing money from. People are familiarizing themselves with how credit works and are making better decisions about their spending habits overall. :)

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Feb 182015
 

The government of B.C. just tabled another balanced budget. Finance Minister Mike de Jong’s latest budget projects a surplus of $284 million for 2015-2016. :) This means B.C.’s $63 billion public debt is slowly being paid down. B.C. may be the only province in Canada to avoid falling into deficit amid plunging oil prices. But there’s something else that the finance minister didn’t tell us. How did this surplus happen exactly?

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In order for any government to have a surplus it must take in more money than it spends. Government revenue comes mostly from tax payers. In the past I have blogged about how money in the economy is generally created by people borrowing from private banks. So I believe a major reason the B.C. government is able to balance its books is because consumers in B.C. are going further into debt. We’re essentially shifting the debt burden from the government to the private sector.

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Feb 062015
 

How Money is Created

For a country’s GDP to grow there needs to be economic expansion, which means people must earn and spend more money. But in order for additional money to exist somebody has to create it first. That’s where you and I come in. :) Money is created whenever we borrow money from a bank. When we take out a $1,000 loan, for example, $1,000 of bank credit is instantly created which we can cash out and spend, which adds $1,000 into the existing currency supply in the economy. This $1,000 did not exist in the world yesterday, but it does now because we created the money by borrowing it into existence. This increases the country’s nominal economic output. Nice. :)  Most of the world’s money today is created this way. Even though we are now $1,000 in debt, the nation overall is better off because our extra spending just becomes income for other people.

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The opposite phenomenon can also happen. If we pay off our $1,000 loan then that money would cease to circulate in the economy and be destroyed forever through debt cancellation. This is deflationary and is what every Central Banker in the world wants to avoid. :?

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Jan 142015
 

The basic concept of debt is simple. It’s when someone borrows money from another person. But once we start looking at different forms of debt such as sovereign debt, treasury bonds, mortgage-backed securities, demand loans, etc, it can start to sound like a different language to many of us. :?

Even the money in your wallet right now is just another form of debt. It may not be your debt but if you trace back that money to its initial point of creation you’d discover who’s debt it belongs to. ;)

Year of the Debt

It has come to my attention that there is a lot of misinformation and confusion about the topic of debt on the internet. That’s why I’m making the proclamation that 2015 will be the year of the debt. I dedicate this year to write more about debt and its impact on our lives. I have even created a new section on the blog that’s all about debt.

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Most consumers are told that being in debt will hold them back from spending, investing, and living the life they want. But this is not entirely true.

Canadians now have more debt than ever before yet our average household net worth continues to reach record highs. So debt and wealth doesn’t have to be contradictory. In fact, often times debt can increase our financial well-being.Alberta has the highest household debt of any province, but they also have the highest household incomes. :)

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Dec 052014
 

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 purse-onality. :D 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. ;)

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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. :?

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