Post-Christmas is the time of year when people sit down and make their New Year’s resolutions. I won’t cause you undue boredom with my New Year’s resolutions of how I need to get back to running 10K three times a week, set aside more money for investing, and pay off my credit card in full every month etc. 😉 The last point is pertinent, because Canadians are amassing enormous debts on their credit cards and lines of credit.
Trahair asks the hard questions, such as are the Canadian banks as strong as people think they are? Is the Canadian Government fiscally sound? How much debt do Canadians really have? Trahair’s message in Crushing Debt: Why Canadians Should Drop Everything and Pay Off Debt by David Trahair (Nov 1 2011) Crushing Debt: Why Canadians Should Drop Everything and Pay Off Debt is simple – debt is everyone’s problem. He suggests throughout the book that Canadians get their consumer debts paid off as soon as they can. This is one of my favorite reads from 2011, and you can enter to win one of two copies I’ve been sent from John Wiley & Sons!
The 2012 Debt Landscape
Post-Christmas 2011 and 2012 New Year’s celebrations, Canadians are waking up to an ever-increasing personal debt load with their mortgages, credit cards, and personal lines of credit. Low interest rates have led to easy credit, and most Canadians are in over their heads. By the end of 2010, the average Canadian had some $25,709 in consumer debt – excluding mortgage debt ( Crushing Debt , pg.77).
Low interest rates over the last few years, has led to an easy credit binge for Canadians, and a credit hangover could be looming – not only for consumers but for the banks and the Canadian Government as well. As Trahair points out, it’s just not a Canadian problem either. Debt has become a massive global problem.
“Never before have the alarm bells rung louder than they are ringing now about the high debt levels in the world today. There are record levels of debt in many countries, companies, and households.” (Crushing Debt, pg.16).
If you’re wondering why the Canadian Banks appear to be in such great financial shape, and think the Canadian economy is purring along, you might think otherwise after reading. The government of Canada is running a 6-billion dollar deficit each and every year, with a total deficit outstanding of over $519 billion dollars (Crushing Debt, pg.16). If the word “deficit” doesn’t mean much to you, then just use the word “loss”. It’s unlikely that this debt will ever be paid off.
Trahair’s review of Canadian consumer debt and how it is intertwined with the Canadian banks, the Canadian Government, and the global economy is extraordinary. The question Trahair asks, is what happens when the government can’t afford to make its payments? It’s happened to European countries such as Greece and Ireland, and the U.S. at the last moment raised its debt ceiling to continue making its payments.
We Are All Intertwined
Many Canadians are under the impression that the business of the big banks or what happens in Europe is far removed from their ordinary lives. But nothing could be further from the truth. Trahair shows the clear relationship between Canadian consumers, the Canadian Banks, and how we are all intertwined with the global economy. As Trahair points out early in, we only have to look back at the 2008 to 2009 Financial Crisis to realize how a sub-prime mortgage meltdown affected the entire world, from U.S. homeowners to virtually every European country, to factory workers in Asia. No one was untouched from the Financial Crisis.
The Bottom Line
Governments rely on taxes, and the banks through debt servicing (mortgage payments and consumer debt), rely on consumers for their income. A change to the bottom line of the average Canadian affects both the banks and the government. If consumers default on their loans or even their mortgages, then it affects the banks. If the banks run into trouble then it affects the government, and if the government runs into trouble it affects the global economy. We are all intertwined! Trahair writes:
“If there is a significant shock to the system, like rapidly rising interest rates, a drop in house prices, or large-scale job losses, many people won’t be able to continue to pay their mortgages, let alone their credit card and line of credit balances.
If that happens to a large number of Canadians, the banks will be forced to record losses on these significant receivables. In accounting terminology, it called recording “loan loss provisions,” or bad debts. Put bluntly, household debt levels are threatening the stability of the Canadian banks. “ (Trahair, Crushing Debt, pg. 62).
In Crushing Debt , Trahair also points out the current low-interest rate environment is an exception and not the rule (Crushing Debt, pg.16). While many Canadians are able to service their mortgages and debt loads at current levels, a change in the prime lending rate could affect many Canadians right at their bottom line – and that affects the bank’s bottom line as well. There’s a reason why the Canadian Government and the Canadian Banks are reluctant to see rising interest rates.
How to Get Out of Personal Debt
Crushing Debt is not just an academic review of the global economy. In chapter 7, How to Get out of Personal Debt, Trahair provides Canadians with a step-by-step account of how to measure their debt, what various debt ratios mean, and how this affects their credit rating. Trahair suggests that Canadians “should try to keep the ratio of total consumer debt (excluding mortgage debt) versus family gross income under 20 percent.” (David Trahair, Crushing Debt, pg. 87).
If you are already over your head, behind on payments, or know you need help with your finances, then you will find Crushing Debt an excellent resource. A substantial portion of this book deals with the various options Canadians have from DMP (debt management programs) to bankruptcy, and how the process works. If you are a Canadian even close to considering either option, then I suggest you get a hold of Crushing Debt and review chapter 7, since you will find an excellent hands-on resource.