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THIS WEEK

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Rebalancing

When trends change, it usually takes some time for the general public to recognize what is taking place.

Economic cycles trigger strange behavioural responses, but only after a considerable lapse of time do we appreciate what has taken place.

For instance, in the so-called Gilded Age in the late 19th century, then again in the Jazz Age following the First World War, and more recently, beginning in the 1980s, consumers ran amuck.

Whether it was lighting cigars with paper money, wild speculation in the 1920s stock market boom, or squandering money as if there were no tomorrow in the previous couple of decades, prosperity and easy money entailed almost unprecedented extravagance.

Nowadays the structural imbalances are playing out right before our eyes. We presently face daunting challenges. A wrenching adjustment program is inevitable.

Currently Canadians are beginning to acknowledge they are reaching the absolute limit on borrowing used to pay for consumer spending. Still, numbers of Canadians have yet to act on this matter. Consumer credit and debit card outlays have continued to expand up to nearly 7 per cent - rather startling data. This does not include financing for homes, which is clearly the single biggest part of household debt.

The continuing bidding wars for houses, particularly in Toronto and throughout B.C., seem to contradict what Canadians say: that they want to reduce spending.

At the present time household debt stands at 150 per cent of income. It is no surprise then that the Bank of Canada stated this indebtedness is “the No. 1 risk to the economy.”

The Governor of the Bank of Canada complained that we seem to be comfortable with high debt, “attributing it to the illusion of affordability at a time of high home values and low interest rates.”

He went on to argue that, “a point comes where house prices adjust downward; the question is how is that going to impact on shoppers’ behaviour”. History shows the effect on overall consumption is more pronounced on the way down than it is on the way up.

Economist for the International Money Fund Daniel Leigh claimed that when housing prices fall, economic recessions are more likely to be severe if previously there had been a rapid accumulation of household debt.

Perhaps the message is starting to get through to the majority, as some these days are willing to delay the purchase of a car or postpone upgrading a house.

This is a new trend by Canadians; to cut back on major expenditures. The reasons cited were the wish to reduce debt and the uncertainty in financial markets. This should mean an era of financial stringency and a rebalancing of spending patterns.

The Wellington Advertiser

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