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Final fantasies: The illusions of personal debt and Canadian consumerism

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Canadians as individuals are in debt. In debt to an extent never before seen in Canadian history, and to an extent never likely to be seen again. Much of this debt, as I noted in an earlier piece, is invested in the ultimate middle-class dream of personal home ownership, a debt that has been backed by the government as a dangerous and "tax-payer" insured form of speculative stimulus.

Yet that is only one side of the equation and only one side to the story of how credit has been used to artificially sustain a middle-class consumerist illusion on a continent that has for decades increasingly turned away from the production of commodities.

The other side is that citizens, spurred on by government facilitated easy credit, have also begun to use credit to create lifestyles that would otherwise be unavailable to them and are borrowing well beyond what used to be the prime component of personal debt, home ownership. They are doing so, in many cases, by using their home equity as security.

The direct result of this is that, whereas in 1980 the ratio of household debt to personal disposable income was 66%; that ratio is now in excess of 150%. This amounts to an increase in this ratio of 127.28%. Over the same period incomes of all family units in Canada rose from an average of $61,900 to $72,700 (in 2010 constant dollars). This amounts to an increase of 17.45%.

What this means is that personal debt in Canada, whether partially intended or otherwise, has acted as a form of not only highly dangerous economic "stimulus", it has also acted as a de facto mechanism of wage suppression and has ensured that the bulk of the risks assumed by this "stimulus" lie on the backs of citizens and not on corporations or financial institutions.

The impulses that lie behind the development of the present situation are clear. Canadians, to an unprecedented degree came out of the "Golden Era" of the post-war compromise better off than they had been in the country's history. Most Canadians, even those that in previous eras might have been deemed to be working-class, were fully engaged and incorporated into the consumerist materialist culture of North American Capitalism to a degree entirely unanticipated by previous generations. This lifestyle had created expectations, (and not, actually, for the most part unreasonable ones) in the minds of citizens as to how they should live and what comforts should be available to them. These expectations became further amplified as the high technology consumerism of the last 25 years dawned and grew, so that now, one may safely say, most "average" Canadian families fully expect to own their own house or condo, multiple televisions, a car or two,  cell phones, ipods, multiple personal computers, high speed internet access, and whatever other endless array of trinkets or technologies that we are bombarded with as the next necessary adjunct to a bourgeois lifestyle. This does not even include the expenses of entertainment, eating-out, dance classes for the kids, yoga workshops, gym memberships, travel and vacations, cottages, etc.

Correspondingly, however, this era of the new consumerism has been built in large part by shipping the production of many basic consumer and technological items "off-shore" to the Third World or to parts of the United States with Third World labour laws, and this has had a depressing effect on wage growth at the lower end of the income spectrum, has greatly diminished the importance of the manufacturing sector, with its relatively high paying jobs,  to our economy, and has meant that our economy as a whole has become tremendously reliant not only on the profit motivated corporate impulse to push production costs down in order to maximize return and availability of product, but on the societal impulse to acquire these products even when they are not actually affordable to us in both personal and broader ways.

Meanwhile, the bottom-line driven cost-slashing impulses of the corporate world have led companies to work very hard to keep wages lower. This does not only apply to the wages of the lowest level employees. All employees are effected by this, outside of the highest level corporate elite, and the mass waves of corporate lay-offs and "downsizing" we see from time-to-time, even in profitable corporations, serve not only to directly cut wages by firing people, but also to intimidate other employees to accept smaller pay and benefit packages or increases. That this is self-defeating in that, in a societal way, it serves to lower demand for the products and services that these corporations produce or provide, is seemingly irrelevant to them. (Remember, demand in an economic sense, is not what people want but what they can afford. This is why lower wages decrease "demand," or why, if one subscribes to classical economic terminology, one could say that there was no "demand" for food in parts of the world where the people cannot afford food).

At the same time, these employees, these citizens, have been led to expect a specific and highly visible, promised and promoted lifestyle that these same corporations are supposed to provide. In a democratic society where the power of Capital is greater than it has been for a generation, these incompatible impulses have to be resolved, to a large degree, by the government somehow. If wages are not increasing to the extent that expectations are, and to the extent needed to keep pushing the production of the goods and homes necessary for these expectations to be met, to keep the profits rolling in, and to keep the country's economy rolling along, what is to be done?

One way is through the implementation of personal income tax cuts. These have highly destructive results in other areas, including on inequality and on social programs and policy, but they do give the short-term illusion to voters that they are "better-off" then they were before because they see more money on their paycheque at the end of the week.

The other is by the extension of, and relaxation of the rules around, personal credit.

If you are not making enough to afford that new car, don't worry, "easy credit" low interest financing and a personal-line-of-credit backed by your home equity will come through.

Now this credit and this "spending" by consumers does stimulate and sustain the economy and economic growth. In fact, without it, it is very difficult to see how the recession of 2008 would not have been much, much worse. The artificial housing bubble was entirely government driven. The artificially and unsustainable low Bank of Canada interest rates of recent years have, in turn, meant lower interest rates on lines-of-credit, car loans, etc. This pushes citizens to go into greater debt to purchase new items and this does, of course, stimulate production and economic activity.

However, it is also something of a house-of-cards. Inevitably, when debt increases to such a disproportionate extent, interest rates will have to increase to cool an obviously dangerous and volatile situation. It was only a few years ago that the prime interest rate was above 6%. Now it is 3%. It will revert. This is just a matter of time.

As a Bank of Canada report noted,  "the ratio of consumer debt to disposable income was relatively stable until the mid-1990s when it began to move persistently higher. The predominant source of this upward trend has been secured personal lines of credit (PLCs), which grew at a much faster pace than more traditional forms of consumer credit such as credit card debt. Secured PLCs, which are mostly secured by housing assets (i.e., home-equity lines of credit), have risen sharply both in absolute terms and as a share of total consumer credit. In 1995, secured PLCs represented about 11 per cent of consumer credit; by the end of 2011, this share was close to 50 per cent."

Thus, we see that many Canadians are using the equity they have in one form of debt, and debt that is in what everyone acknowledges, including our own Finance Minister, a housing bubble that is now cooling (at the most optimistic interpretation) to allow themselves to assume further debt. Debt that was attained during a period of low "easy" credit interest rates but that is transitioning into higher and less consumer friendly interest rates. When and if the bubble bursts, and to what extent it bursts, could have a devastating correctional impact on these PLC's and could also have a terrible impact on the economy, the personal well-being of hundreds of thousands of Canadians and a highly detrimental impact on the government's budgetary situation due not only to the fragility of the CMHC situation, but also due to the ripple-effect on the economy as a result of personal bankruptcies, foreclosures, defaults, etc.

In the end, as a society we have created a culture of debt, not to sustain ourselves through times of need, but rather to sustain the self-indulgence of our consumerism and the hyper-profits of corporations. Our debt cushion, a cushion that means that the average Canadian is now over $100,000 in debt, is the only thing that keeps the house of cards intact and is the only reason that we can have a society that is based on consumption ahead of production and that outsources the heavy lifting for its consumerism to the less fortunate of the world.

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