Citizen Action Monitor

Warning signs of financial crisis ahead as Canadian household debt reaches record high levels

Survey of recent business news reports reveals consensus — “debt will not delay the crisis much longer.”

No 1870 Posted by fw, January 15, 2017

Michael Thompson

Michael Thompson

“Here, as productivity rose, real wages were driven down below the market price of many commodities to maximize capitalist profits — for personal enrichment and reinvestment. This would drive down demand, as purchasing power drops with real wages, as noted by the Globe, generally creating a bust — causing production shutdowns and driving some out of business — if not for debt. However, the Bank of Canada’s most recent study suggests debt will not delay the crisis much longer.”Michael Thompson, Dissident Voice

Mitchell Thompson, a journalism student at Ryerson University, surveyed the recent business news in the preparation of this article: below is a summary of his depressing findings.

Is there any good news out there? I peruse dozens of articles every day, mainly from progressive, left of centre sources, and the news is mostly grim and getting grimmer. However, in the pages of Postmedia’s Windsor Star, all is merry and bright and frothy and banal, very banal — which is why I only read the comics.

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Canada’s Household Debt Crisis: Blame Capitalism! by Mitchell Thompson, Dissident Voice, January 12, 2017

Canadian capitalism is in crisis, with household debt reaching a record high 166.9 per cent of disposable income and about 208 per cent of GDP, and wage stagnation is a primary cause.

Richard Vague told the Globe and Mail “any country whose private-debt-to-GDP ratio goes beyond 150 per cent and that has a five-year growth rate of 18 per cent or greater in that ratio experiences a financial crisis at some point.” The Globe says Canada has already passed both benchmarks in its ongoing borrowing binge.

The headlines get grimmer every week and the causes, outlined by the business press, are surely of interest to the left.

Over half of Canadians cannot save 5 per cent of their earnings, the Globe says, as they are “overwhelmed by debt.’” And, worse, the last quarter saw debt increase four times faster than incomes.

The National Post attributes this to policy keeping the Bank of Canada’s interest rate abnormally low since the 2008 crash, to incentivize a surge of lending to buoy up a struggling economy.

More fundamentally, Vice News says, debt has been used to supplement wage increases, after years of stagnation.

David Oliver writes similarly for the Toronto Star:

For most over-indebted Canadians in an era of spiraling fuel, tuition and other costs, and only stagnant income with which to cope, maxing out on credit cards and the credit lines that banks were eager to offer became an irresistible means of funding everyday needs like new clothes that kids had outgrown.

By Unifor economist Jordan Brennan’s math, real working class wages have been mostly stagnant since 1977, increasing by about 3 per cent while workers became about 50 per cent more productive, Canwest reports. Brennan attributes this stagnation chiefly to attacks on unions leaving workers without an organized mechanism to pressure employers for increases.

Normally, as noted by the Globe and Mail’s Report on Business, that has a “negative impact on real consumer purchasing power.” That, in turn, is bad for business, because business viability requires that people buy stuff.

However, this drop in purchasing power has been delayed thus far by over-lending, allowing Canadians to borrow beyond their means. That has put us ahead of the G7 debt-wise, but it has created a sizable boom for corporate Canada that’s helped buoy the economy since 2008.

This has been seen mainly in rising house prices, driven — to a much greater extent — by “irresponsible lending and rising domestic debt,” than foreign buyers, the Financial Post reports, but it is visible elsewhere as well.

The Toronto Star says “low interest rates have given us too much of everything. Too many coffee beans, too much steel, too much coal and iron ore to make the steel, too many tankers to move around too much oil and too many freighters to move around too much coal.” The Star says this is because the surge “seduced companies to pursue projects that would not have been profitable or feasible with higher-cost debt.’”

But more ominously, the Star refers to the debt surge used to replace wage increases as the process by which “a sea of cheap money created bubbles that have formed and burst with increasing frequency.”

The Bank of Canada’s last report reached the same scary conclusion “Canada’s dangerous brew of debt and inflated house prices could combine to devastate the economy,” Maclean’s reports.

This should ring a bell to anyone with a passing familiarity with Marxist economics and the theory of the crisis of overproduction, in particular.

Here, as productivity rose, real wages were driven down below the market price of many commodities to maximize capitalist profits — for personal enrichment and reinvestment. This would drive down demand, as purchasing power drops with real wages, as noted by the Globe, generally creating a bust — causing production shutdowns and driving some out of business — if not for debt.

However, the Bank of Canada’s most recent study suggests debt will not delay the crisis much longer.

Is it too late to say Marx was right?

Read other articles by Mitchell.

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