The Candyman

Steve Saretsky -

This is a post from The Monday Morning Newsletter. You can subscribe here

Happy Monday Morning!

Another week, another reminder Canadian households are suffocating under a mountain of debt. It’s a tiresome story, one that gets repeated every few months, yet shows no signs of disappearing anytime soon. The statistics are concerning, Canadians owe $1.75 for every dollar of disposable income, while the debt servicing ratio reached a record high 14.96% in Q3 2019, despite interest rates near rock bottom lows.

Canada household debt service ratio
Canada household debt service ratio hits record high in Q3.

The Bank of Canada Governor, Stephen Poloz, who is responsible for setting interest rate policy, or in other words, the price of money, faced the music from critics this past week. Following a press conference in which Governor Poloz acknowledged “The high household-debt load is the most important risk facing the financial system” he was abruptly challenged by BNN Bloomberg’s reporter Andrew Bell.

“But aren’t you the man who is to blame for that?” Bell asked. “You’re the candyman. You kept those interest rates so low all those years. You’re the main author of that bubble, aren’t you?”

A rather stunned Poloz, who’s actions are rarely questioned by the media, paused for several seconds before acknowledging,  “A lot of things may have contributed to it, and certainly I would say keeping interest rates low, as many countries have had to do for over 10 years now.”

Adding, “Even though the economy is at full employment, more or less, and inflation is on target, we’re there, but at really low interest rates from a historical standpoint. So those low interest rates are still stimulating against some contrary force. The fact inflation is on target suggests that the Bank of Canada has done its job.”

“Now if there are side effects – one of them you mentioned – well, those are secondary effects. They’re not our prime mission. Our prime mission is to stabilize the economy and keep inflation on target. And we succeeded with that.”

Safe to say Mr.Bell won’t be receiving a Christmas card from Poloz this holiday season..

While the Bank of Canada is at least partly responsible for leaving Canadians with a mountain of debt, the reality is Canada largely imports monetary policy from our neighbours to the south, so perhaps we are being too hard on Poloz. Consider this, despite the stock market at all time highs, housing prices at all time highs, the longest economic expansion in history (125 months), jobs growth the longest in history (110 months), the US federal reserve has cut interest rates three times this year and has grown its balance sheet by $335B over the past three months.

global central bank balance sheets
Central Bank balance sheets.

We live in a world of unlimited free candy, and yet we wonder why we’re sick.

This is a post from The Monday Morning Newsletter. You can subscribe here


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