September 30, 2013

By Margaret H. Johnson

Lots of news these days about debt. Not too long ago, we were told we finally started to reduce our debt levels. Next, we’ve been told that seniors are in trouble financially – and going deeper in debt.

Recently we were scolded once again for slipping back into the debt spiral.

The discussion on CBC included mortgage debt and that consumers were rushing into the market to beat predictable interest rate increases in the future. And, in a rare moment of full disclosure, they revealed that mortgage debt was backed by an asset – homes - and that the debt picture with the home equity included wasn’t all that bad.

That said, consumer debt received the spotlight for what it is – credit card debt being chiefly unsecured and not backed by assets – and car loans where cars, in contrast to real estate, depreciate in value.

The Bank of Canada reported September 13th that consumer debt is currently $513 billion in Canada, up from $510 Billion in January 2013.

Each time these reports hit the media fan they are met with surprise and concern – like this is something new and consumers are out of control and can’t manage their debt loads.

As I have repeatedly stated, we need to know more about the consumer debt-side of the overall debt discussion. Who owes the money? Obviously, the wealthy owe less than the lower or middle income families.  As our debt levels have increased each and every year since the 1970s, something more serious, more fundamental has been happening to the economy than a bunch of profligate consumer spenders overindulging on their credit cards.

Berkeley professor Robert Reich, author of the 2012 publication Beyond Outrage, shows why a higher share of income and wealth going to the rich makes life worse for everyone else and threatens democracy. He draws a parallel to the Robber Baron era of capitalism in the United States – where the wealthy owned most of the national wealth.

The current dilemma with income inequality has been mitigated by a number of factors:

  1. Women moving into the workforce transforming the nuclear family unit with a single bread winner into two income families;
  2. People borrowing.

People only began to borrow after it became socially acceptable for people to borrow and go into debt to pay their household expenses – and that the credit resources were granted (extended) to middle and lower income families by the financial institutions. The primary problem of wages falling behind inflation (and taxation) essentially disappeared as merchants and consumers engaged in a feeding frenzy of unparalleled profits and acquisition of consumer goods and services. For example, in 1975, the total outstanding consumer debt in Canada was $20 billion. It doubled between 1975 and 1980. Then, it jumped from $40 billion to $100 billion in 1990.

By 1990 a number of consequences to a growing dependency upon credit began to appear. Families were beginning to experience a lifetime struggle with debt. They couldn’t get out of debt. The constant worry and anxiety over impossible levels of consumer debt resulted in record breaking bankruptcy filings and marital breakdown. Student loans joined an expanding list of creditors causing bankruptcies and anguish to a cash-strapped middle class.

The instant gratification culture came to the rescue in the early 1980s when it was openly advertised by financial institutions and experts that credit was not only okay, but good. Live today. Use your credit card to get the maximum out of life. In the 1990s financial planners encouraged people to leverage their properties and invest, invest, invest.

Credit was good for everybody.

By 2000 consumer debt had reached $187 billion.

A rude awakening in 2007-08 shattered the national (and international) dream of a credit society up to its assets in debt. The warm magic of credit turned into cold cold debt – debt could be dangerous and now threatened the global economy with an economic crunch unmatched by anything before except for the Great Depression in 1929.

Today, the consumer debt load in Canada as reported by the Bank of Canada is $513 billion. We are really coping with the fallout from the historical practice of using credit to subsidize incomes for the basic essentials of life. And, the ugly realization that once in debt, it isn’t so easy to get out of debt.

I am happy to see the universities drawing attention to the role income-discrepancies are playing in the debt problems that middle and lower income families face when compared to the distribution of wealth. And, how debt threatens the very existence of the middle class, driving society back into two groups, the rich and the poor.