Crazy Canadian spending

Date posted: February 16, 2011

Canada didn’t suffer a financial meltdown like the United States did in recent years. As a result Canada has gotten a reputation as perhaps the model for moderation in both spending and investing. However, a recent statistic blows away Canada’s image of frugality. N.C. State University economist Mike Walden explains.

“Well … for the first time in over a decade the average indebtedness of Canadian households is now higher than that for U.S. households. In fact, Canadian household debt as a percent of disposable income is 148 percent — it is 147 percent for the U.S.

“And this really blows away, I think, the conception a lot of people have had of Canada. … They didn’t go through this financial meltdown. Canadians have been viewed as much more fiscally frugal, and then here we find that they are actually in debt at a higher level than we are right now.

“And what’s happened is that actually the fact that Canada didn’t go through a financial meltdown put their banks in a very good position. Those banks have been lending at much greater rates than our banks have been lending recently. So borrowers are taking out more mortgages. They are taking out bigger mortgages, and that has boosted the indebtedness of the average Canadian household. It has also put the Canadian government in a bind. If they try to curtail that borrowing, it could spark a recession as it did here in the U.S.

“But I think the point here is that a lot of people, when they were trying to explain the financial meltdown, they said, well, it was cultural factors. It was the fact that Americans just didn’t think of the future — they were just taking on all of this debt. I think what this example with Canada illustrates is that economics really can explain a lot of the changes in personal financial numbers.”

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