New numbers about personal debt loads have come out and they point towards an impending economic catastrophe in Canada. Many politicians and economists eagerly tell the public that Canada has come through the worst of the recession and the economy will be rebounding very soon. But, the numbers tell a different story. Canada, so far, has been hit hard by the fallout of the global recession with exports of manufactured goods plummeting, but until this point the domestic markets have remained strong. This is about to change.
Consumer spending in Canada dipped slightly in 2008, but shows signs of recovery in 2009. Consumer spending is an important motor of any economy and an empirical look at Canada’s data could give an economist reason for optimism. It has not plummeted the way that consumer spending has in many other industrialized countries. But a closer look at the debt load of Canadian consumers shows a large problem brewing under the surface. Canada’s household debt has swelled to a staggering $1.3 trillion; this is very close to Canada’s total GDP.
A new report issued by the Certified General Accountants Association of Canada says that outstanding personal lines of credit have risen by 20.4% in the last year to a record $181 billion. That figure is up from $50 billion in the year 2000. Credit card debt is up 8.9% to $51 billion, and personal loans are up 8.1% to $48.5 billion. What is more telling, is that 58% of those surveyed said that day-to-day living expenses accounted for the increased debt load. These numbers are very troubling indeed.
The continued expansion of consumer credit reveals two things. First, the Canadian working class is living beyond their economic means; capitalism cannot sustain the lifestyle that Canadian workers are living. And second, the economic decline we have witnessed so far has not corrected any of the fundamental problems the Canadian economy is facing.
We have previously explained the credit bubble that developed in the industrialized world. The bursting of this bubble has sent the world economy into turmoil. These numbers clearly show that this bubble is yet to burst in Canada. All of the financial trouble so far, has been due to the fall-out of the rest of the world economy. The manufacturing sector has taken a major hit on falling exports, but internal demand has so far held up. This shows that, for Canadian workers, the worst is yet to come.
Canada’s consumer credit bubble is clearly reaching its limits. 85% of those surveyed said they carried unpaid debt on their credit cards and 84% said their debt was increasing. The same survey showed that 21% did not feel they could manage the household debt they already had. If even half of those were forced into bankruptcy, it would be an economic bombshell. The rise of personal debt has translated directly into huge profits for the ruling class. This helps to explain the dramatic increase in the divide between rich and poor in Canada over the last period.
Debt is a peculiar creature. As we know, the value of a currency is roughly equivalent to the total value of commodities that this currency represents. The Bank of Canada and other central banks are now printing money and giving this out to their Governments and financial institutions. This cheapens the value of the currency, which results in inflation. Karl Marx said that the ultimate goal of the capitalist class was to create capital without actually producing anything, and at first glance it looks like this is what they are doing. But that of course, remains a pipe dream; money cannot magically appear and all of this money is expected to be paid back. By allowing the massive expanse of credit, the capitalist class has essentially placed a mortgage on their future market. To give an idea of the extent of the problem, the CGAAC claims that 19% of Canadian assets and 23.7% of net worth is comprised of debt.
The route of the problem is not debt itself; debt plays an important role in the functioning of the economy. The problem is in fact the capitalist mode of production. Production for profit leads to over-production, which is at the heart of every economic crisis. The capitalist system creates products faster than it can create a market for them. Eventually, supply outstrips demand and the economy seizes up. Credit can play a valuable role in expanding production and investment, but when used to extend a market that has reached its limits, it can only lead to disaster. This is what has happened here. Massive consumer credit has stretched the markets for products to the breaking point. Now production has caught up.
It is very likely that much of this debt will never be repaid. Large sections of the working class are stretched beyond their means and any unforeseen cost could push them into bankruptcy. Debt that is not paid back, will be marked as a loss for the banks. As bankruptcies begin to rise, the banks will be forced to raise interest rates to make up for the loss. This, in turn, will push even more people into bankruptcy.
The situation that this archaic system has created is untenable. The living standard that the working class in the west has enjoyed since the end of the Second World War is an anomaly in capitalist history. Capitalism is an economic system that extracts wealth from the productive layers of society to give to the least productive. It is a system that is designed to exploit. And in the coming period, the real nature of capitalism in Canada will be laid bare for all to see.
