Carolyn Wilkins – the Senior Deputy Governor of the Bank of Canada – is warning that Canada’s households are vulnerable to a negative economic shock because of high debt levels. “In the case of Canada, the vulnerability we’re thinking about right now is indebtedness in the household sector, which has been on an upward trend for a number of years and has reached levels that say to us the household sector is vulnerable to any kind of negative shock,” Wilkins noted.
This is a key feature of rising debt. Things can seem fine for a very long time, but as debt rises vulnerability and fragility grows. As a result, a severe economic downturn could cascade throughout our economy, as those unable to pay their debts would cause lower consumption levels, leading to recession and job losses, which would leave even more people unable to pay debts and cause a downward spiral.
Unsurprisingly, while households face increasing vulnerability, the banks seem to be doing just fine. Wilkins says stress tests conducted by the Bank of Canada show the banks able to withstand a big drop in housing prices, a recession, or other negative factors. “In either case … when we apply those stress tests to our large Canadian banks, the core of the Canadian banking system, the capital levels, liquidity levels, are high enough to withstand that. And that’s just because they are so, aside from being well capitalized and having liquidity, they are well diversified as well.”
So, while Canada may not be facing a US-style banking crisis (mostly because we didn’t let the bankers write their own regulations), we still face serious economic risks from the rise of household debt, and the increasing struggle faced by millions of Canadians. And yet, at this exact moment, the federal government is imposing new taxes (particularly the carbon tax), that will make life even more expensive and make debt an even bigger burden for Canadians trying to maintain our standard of living.