Canadian Personal Finance Blog

So the Bank of Canada announced on Thursday that one of the threats to the on-coming recovery in Canada is that Households are holding too much debt. To be specific:

The vulnerability of Canadian households to a deterioration
in economic conditions has risen in recent years, as
aggregate household debt has increased in relation to
income. There is thus a risk that a shock to economic
conditions could be transmitted to the broader financial
system through a deterioration in the quality of loans to
households.

The report outlines that the levels of indebtedness in Canada are nowhere near catastrophic levels, however, we are heading in the direction that may lead to that kind of failures in the system. Remember I have been a bit of a broken record that maybe it’s time to start paying back debt, instead of picking up more debt now. The report also points out that if the “recovery” dies off and we go back into the economic “crapper”, household debt failures are going to happen a little more often.

There may come a time when lenders in Canada may tighten the purse strings and turn off the credit taps, and that would be an inconvenience but not a big issue to some folks. If they decide to rethink or revisit existing risks in the system that is when we can start seeing interesting scenarios like banks refusing to re-new Mortgages of existing customers (not likely, but if you have debt still a remote possibility).

The only absolute way to not have to face this possibility is to get out of debt and then you have control of your own finances. Much like the only absolute form of birth control is abstention (the Vatican is correct on that one, unfortunately), the only sure way not to have issues with your Debt Vehicle, is to retire it quickly.

(Sorry about the Planned Parenthood reference, one day I’ll write about how Vasectomies are not fool proof either).

The Bank of Canada kept their key overnight rate at 1/4 per cent, yesterday, keeping with their plans to keep the cost of borrowing money low until mid 2010.

In Canada, as expected, the composition of aggregate demand is shifting towards final domestic demand and away from net exports. In the third quarter, the balance of these shifts resulted in weaker-than-projected GDP growth. Core inflation in recent months has been slightly higher than the Bank had projected, although total CPI inflation remains close to projections.

So you can read between the lines that inflation is starting to worry the bank a little, but for now they are not willing to turn up rates to maybe combat it before it gets rolling. If fuel prices remain low, inflation may remain under control, but if there is a spike then we may see big interest jumps in reaction to this sooner than June of 2010.

My advice to those who ask continues to be, take advantage of these low rates to PAY OFF debt, not get more debt. If you can afford to make over payments on your debt vehicles, do so, you get more bang for your buck, and you’ll get better pay back than most things you might invest in, these days as well.

TD Rates Up

TD followed through with there promise to screw up my Secured Line of Credit making it a “Prime” (their definition of it, not the Bank of Canada’s) plus 1.0% rate, instead of the “Prime” + 0.5% that it has been for the past 8 years (dating back to my days with Canada Trust). The explanation for this increase was very suspect (in my opinion), claiming that the borrowing markets are tight and it is much harder for the bank to borrow money. What does this have to do with an existing loan that they underwrite?

I think I would respect more a statement like, “See if you can find a lower rate somewhere else, we dare you!”. That kind of statement makes much more sense to me.

It seems the Canadian Dollar is again rocketing up in value compared to it’s anemic continent-mate the once mighty U.S. Dollar, which could mean many different things to we Canadians such as:

1. We need bigger wallets because our money is worth so much more, OK, that is a joke, however, Canadians traveling to the U.S. or buying U.S. securities are getting “deals” now due to the Canadian Dollar being so high in value. Maybe it’s time to think about buying some American assets? How about going to the states and buying your snow tires down there, might be cheaper too!
2. Canadian Workers now are no longer just lazy and shiftless, we are bloody expensive too. Again, a weak attempt at humor, but it is very bad news for Canadian Firms attempting to sell either their services or their products into the U.S., as now our products have increased in value, without us doing anything.
3. The Canadian Dollar might become the “World Standard” for money, yes, another weak attempt at humor, the Euro is more likely to take that mantle away from the U.S. greenback very soon (if not the Chinese Yuan).
4. Given our dollar is only worth 0.65 of a Euro and 0.61 of a Pound Sterling maybe we shouldn’t worry so much? That’s a naive answer, our biggest trading partner is the U.S. and if they stop buying our stuff, it is going to hurt, but luckily some of the stuff they buy they really need, like Oil. Given oil prices have dropped, not as much, but our American Cousins are still addicted to Crude and we are their major pushers right now.

Does this mean the Canadian economy is so much stronger than the American? Um, no, it means the U.S. economy is in bad shape, but it can easily drag Canada down as well, so it behooves us to help our U.S. comrades to get out of this Economic Funk and get back to their free spending ways (and of course Buy Canadian!).

Conclusions?

Before the Loonie drops again, maybe whip across the border and pick up:

• Snow Tires
• Some electronics stuf
• Clothes
• A Whole Market ETF

and of course remember to declare it all at the border (and remember to bring your passport too).

OK the film from the NFB is actually HOW they make pennies, but as I asked last weekend, the better question is, WHY do they make pennies?