Tag Archives: recession

Broke People Can’t Stimulate the Economy

At the risk of stating the obvious: Broke people can’t help stimulate the economy. Just ask the U.S. what 2008 to 2011 was like. When both Canada and the U.S. have about 75% of the economic activity being consumer spending – when you and I cut down our spending, there’s trouble.

While we may avoid a recession, our consumer spending is going to slow down. Lots of people are still using COVID savings, but credit card debt is rising and every year millions of people are needing to get or renew a mortgage at rates of four to five percent higher and inflation has made almost everything a whole lot more expensive. That has to create a slowdown of some kind, in some ways, at some point in time. Less consumer spending leads to less retail sales, less manufacturing and less economic activity everywhere. The next wave is less hiring or layoffs, and the vicious cycle escalates.

But it’s not your job to stimulate the economy with borrowed money. That’s a financial suicidal pyramid scheme. At some point, you’re out of money, out of room on your credit card, and can barely pay the payments  you already have. But that’s what the government needs you to do in order to keep the economy growing. So, on the one hand they’re tightening up mortgage rules to cool down the market and warning that our debt to income ratio is over 160%. On the other hand, they really need us to keep spending so the economy picks up. Yup, it’s a vicious cycle with totally mixed messages: On the one hand they kept lowering interest rates to make borrowing easier and cheaper, on the other hand they hit the brakes with more mortgage restrictions to not overheat the housing market.

I talked to a lady last week that was really concerned that her husband’s hours would be cut back. They really need to keep earning their $70,000 family income or they’re in real trouble. In other words, they’re buried in debt from previously helping out the economy so much. Now they’re out of the spending business because they “need” every dollar of earnings to just keep their head above water. And that story applies to millions of Canadians. It was fun while it lasted – but they’re now in the middle of one giant hangover.

For teenagers, the number one favourite activity is going to the mall. Teenagers help the economy. They’ll spend $10 or maybe even fifty bucks. But when they’re out of money – they’re out of money. They don’t have access to credit cards. While teenagers are a big part of economic activity, it’s all with real money and not borrowed funds.

That’s why tons of teenagers are richer than their parents. Sure, the parents have a lot more money each payday. But within 48 hours, that’s all spent and gone…and then some… on credit cards or lines of credit. Teenagers don’t have that curse or opportunity.

I’m all in favour of helping the economy – right after you help yourself and get to be debt free. Then you’re contributing to the economy with real money!

Ready For The Recession?

Happy New Year! But likely not so happy in the financial world for the next six months or so as it’ll be unlikely that we’ll avoid a recession this year.

While rate increases happened pretty much all of 2022, the impact isn’t usually felt in a big way by consumers for at least six months. And that time is upon us. Actually, it was upon us in November or so, but there isn’t anyone who’s going to turn off their spending tap right before Christmas. There also aren’t many companies who want to be seen as Scrooge in doing big layoffs in December.

January, however, is very different and we’ll see an immediate decrease in consumer spending and a large increase in layoffs. Once person’s spending is another person’s (or companies) income. That creates a spiral effect boosted by inflation and high interest rates that’ll accelerate a slowdown rather quickly.

While 80% of Canadians holding a mortgage have a 5-year term, this year another one-fifth of those are up for renewal. Add that to the one-fifth who renewed at much higher rates last year and 40% of them are now facing the reality of $400 or more in mortgage interest. National Bank estimates that the median amount spent on mortgage costs is 67% of income. The normal ratio anyone uses is around 30% tops and this is an even worse situation than the early 19080s. That doesn’t leave a lot of money for non-essential spending for those who are laid off, had their hours cut back, are in the 40% who’ve had to renew their mortgage or the 20% who had a variable rate mortgage all along. That group of being hit with huge mortgage renewal rates will keep going until 2027. That’s the big advantage the U.S. has where everyone has a 15 or 30-year fixed mortgage…

Oh, and rental rates keep rising as landlords pass on their higher carrying costs, utilities, etc. so you can add most renters to the large group of people who are now barely able to cover their basic living expenses.

That’s assuming we’re not using credit cards to keep up our lifestyle. Since the end of summer, credit card pay rates (the percentage of balances paid each month) has been dropping significantly while auto loan arrears are growing.

So happy New Year is more likely to be an un-happy new year of 2023…

Our Inevitable Recession

As we’ve talked about for more than a year, it’s coming – and at a really bad time for the average Canadian and the country.

This article from Diane Francis (in the National Post) describes it very well and it’s worth the read:


Six Short Stories Worth Talking About

It turns out that all that economic happy-talk is mostly that – talk. The U.S. Federal Reserve just released the minutes from their last meeting, and don’t really see much light – just more tunnel. They now expect the economy to shrink by over 2% this year and don’t see much improvement in consumer spending. That’s something I said for two months. About 95% of people get a tax refund this time of the year. Of course consumer spending looks good in March and April. But that’s not a trend.

Newsweek actually ran a story a few weeks ago with the headline: Stop Saving Now! Here we go again, politicians and now the media telling us to spend money to help the economy. Sorry, you gotta look after yourself first, and spending money we don’t have is exactly why we’re here in the first place.

We talked a few weeks ago that for us, just like businesses, debt is a house of cards that won’t last forever. By now, we’ve all heard the stories of the Phoenix Coyotes bankruptcy. The NHL team had over $80 million in debt, and was losing $30 million a year. That’s on top of the City of Glendale, where the Coyotes play, who borrowed $180 million to help build the arena! It’s another example of a business model based on debt that doesn’t work.

If you thought you’d heard of everything in the world of internet dating, think again. There is now a website, creditscoredating.com, where you’ll find dates based on your credit rating. Yes, this site does believe that romance and a good credit score equal success. I’m not sure how or why, but NOW maybe you’ve heard it all – for a while at least. I’m single but someone’s credit rating isn’t going to attract me to someone – sorry.

In this recession, our definition of what we think of as necessities versus luxury items is rapidly changing from three years ago. A Pew Research poll from April shows that our finances definitely influence what’s a must have, instead of a want-to-have:
We think of necessities as a home computer, high speed internet and our cell phone.
But what’s now considered luxury items include microwaves, televisions, dishwashers, and air conditioning.

No More Lineups?
IBM, and the grocery chain, Giant Foods, in the Mid Atlantic area, have rolled out a new way to get in and out of the grocery store in one-third of their stores.
What do we do now? We load items into a basket. Line up at the cash register and unload everything so it can be scanned. Then everything gets re-loaded into bags.
Well, a few years from now that will be about as antiquated as a typewriter. Instead, you’ll get a small portable scanner as you enter the store. Just pick what you’re buying off the shelf and scan it. The scanner will show the price of the item and keep a running total of what you’re purchasing. Put everything you’re buying into a bag, and walk out of the store. That’s it! The total will be debited right out of your bank account, or off your credit card – whatever you have already set up with the store.

Just imagine – no more lineups, no more cashiers, no more unloading and re-packing everything. It’s literally as simple as pulling your purchases off the shelf, scanning them and getting out of there.

Producer Michael Moore, who has done documentaries on President Bush, the U.S. healthcare system and GM, is now making one about Wall Street and the meltdown. It is still unnamed, but scheduled for release in October, and you have to know it’ll be controversial.