Canada's consumer debt scare a bit misleading!

In a perfect world, the BoC would be raising interest rates to normal levels because the domestic part of the Canadian economy (ie., mostly consumers) don't need them - we didn't suffer a major recession like the US, our housing market has continued to grow and we don't have record high unemployment either. Problem is, the BoC cannot raise interest rates because if it did it would send the C$ up rapidly and hurt the already struggling export side of our economy.

Faced with this dilemma, the only course of action the BoC really has to slow debt growth (without raising rates) is to "talk up" the risks of too much debt using moral suasion.  Judging by the way the media always takes a "sky is falling" approach to stories like these - see here - I'd say the moral suasion approach could work for the Bank if only because the media's focus on Canada's debt to income ratio being higher than the US is misleading and scares the daylights out of most people! (especially those who think this is what caused the US economy to topple over two years ago.)

But the reality is, our personal debt situation in Canada is hardly as bad is its being made out to be and nothing compared to what got the US in trouble a couple of years ago. Don't get me wrong, recent debt growth in Canada is unsustainable and some households are very close to financial capitulation. But the main problem with the debt to income ratio is that it compares a "stock" variable like debt with a "flow" variable like income. That's like comparing apples to oranges.

A more meaningful measure is a comparison between a stock variable like debt (your mortgage and other credit) and a stock variable like total assets (ie., your house, your investments, your cash etc). On that score, the chart below shows that debt ratios in the US outpaced Canada dramatically at the height of its housing bubble (and still does today despite the deleveraging that is going on in its economy). Again, I have to emphasize that we should not be unconcerned about Canadian personal debt levels - they are still at record high levels even on a debt to asset basis. But Canada is certainly nothing like the US was in 2007 and a high personal debt to income ratio in and of itself, is not a recipe for disaster.