Monday, 20 September 2010

Challenging BMO Senior Economist Sal Guatieri

Via Twitter, I read an interview with BMO Senior Economist Sal Guatieri.

I haven't taken Economics 101 (isn't it obvious?), but Sal's conclusion that we are not headed for a double-dip recession rang false with me. The key statement that jumped out at me was this:

"Canadian consumers likely need to tighten their belts a little bit. There’s no question we are sitting at a record level of household debt right now. Debt has grown much faster than income in the past eight years, both mortgage debt and personal credit. That is simply unsustainable in the long run. Consumers will need to slow their rate of spending and borrowing back down in line with income growth, or else they will face a lot of stress going forward, especially when interest rates move back to more normal levels over the next couple of years."

Income growth? What income growth? Most people I know have had their salaries frozen for the last 2 years. Before that, the raises weren't even matching the so-called "cost of living" percentage.

The economist answer is that once the economy revs back up, companies will start giving raises again. But will those raises be enough to cover the total costs due to inflation over the last 2-5 years? No. They won't.

And that's a key point. Even during this recession, costs of living have continued to increase for food, energy, taxes etc. This contributes to the financial pressures consumers are under, forcing them to cut back on savings and/or borrow. And then interest rates rise, causing the debt servicing costs to go up, effectively punishing consumers for not getting raises.

Yes many people make dumb financial decisions. (If we were smart, the credit card industry wouldn't exist. The fact that it does, is evidence of what is wrong with our system.) But even the most fiscally responsible person cannot beat the math of rising costs outpacing income.

So my question to the super-expert BMO Senior Economist Sal Guatieri is this: How are we supposed to tighten our belts when our costs increase faster than our income? How do we avoid debt in that scenario? Tell me, I'm all ears.

6 comments:

Ken Breadner said...

Hear, hear. Raises? What are those? I'm currently watching labour negotiations play out at Loblaws/Zehrs. They'll strike; I'd lay money on it. Catelli, you'd be amazed the contract they're trying to force. All new hires to be part-time for a minimum of five years before full time eligibility. Minimum wage, with no raises over the part-time period. And it goes on. This from a company that turned a tidy profit in Q1 this year. But what the hell, they could always make more, right?

Catelli said...

They're competing with Walmart right? Walmart pays shit to their employees (and they have what like one person in the grocery section if that many?)

Consumers flock to Walmart to save money, validating the business choice to pay shit retail wages.

It's a vicious downward spiral. When wages in the median fall, they force downward pressure on the low-end wage earners, who feel it more because they're closer to the edge. Their buying power is reduced, which means less people buying "luxury" items, driving down income for higher earners.

We're all slaves to the dollar, in the hunt for a deal, and real people pay the price. Which of course brings me back to my ideal society that doesn't rely on monetary exchange.

Catelli said...

And Voila! http://blogs.wsj.com/economics/2010/09/20/watching-walmart-at-midnight/

ADHR said...

The whole "debt is too high" thing is nonsense anyway. At issue is badly-managed debt. Mortgages with 5% down, for example. Housing is not a terribly stable asset, and it's relatively easy to find oneself with more debt than equity. Or consumer credit cards rather than a standard card (VISA, MasterCard, etc.) Debt itself is necessary for growth; if everyone lived within their means, our economy would collapse.

And, of course, that's ignoring the basic issue of your post, namely that income has stagnated for years. Applies to those of us in the so-called "public sector", too. Although I technically get wage increases, thanks to the collective agreement, they've never kept up with increases in the actual cost of living. (As compared to the economic value of the "cost of living" -- I've never quite gotten what that really measures.)

And, thanks to King Dalton, even that minimal protection is about to be stripped away.

Catelli said...

Its very hard to predict when well-managed debt will turn into poorly managed debt. Especially with things like mortgages, with a 20-30 year commitment. Mind you that cycle is self-feeding, people take on mortgages they can't afford but the demand drives up prices, making more unaffordable for more people who then take on mortgages they can't afford, etc. etc. That cycle is almost completely consumer driven and we do it to ourselves. As I posted a few months ago, if I had to buy my current home at its current value, I couldn't afford the mortgage, I'd be turned down, but we could afford the same house 10 years ago.

I happen to be doing quite well, which may attest to my financial acumen, but I fully realize that a large degree of luck played into it as well.

The biggest problem with debt that I'm finding is the time-line to pay it off. It is very hard to predict what expenses will be forthcoming over the next 10 years, and what your income will be. It takes very long-term thinking (and a lot of patience, putting off some purchases for years), which I find most of us have in very short supply. Though debt is necessary for bigger purchases, we are often ill equipped (educationally and emotionally) to deal with it properly.

Ken Breadner said...

Completely off-topic, but I thought you might want to see this and, perhaps, weigh in. Scary stuff.