Economic Crisis Goes Mainstream

In an unusual move, the Bank of Canada issued this week a warning to Canadians on the issue of their indebtedness. In a video entitled “The risk of household financial stress and a sharp correction in house prices”, the Senior Policy Advisor of the Bank, Joshua Slive, talks about the risks highly indebted households are facing in the case of an economic crisis and a correction of property prices.

According to Mr Slive, the large Canadian banks will be able to handle even a large drop in property prices. He does not specify, what he means by “a large drop” – 10 %, 20 %, or more? It is also interesting that, while he is worried about indebted Canadians, he does not worry about the banks that loaned them the money. It is enough to take one look at the Italian banks, in order to see what hapens when a large number of people and businesses default on their loans. Italian banks are dealing with a total of €360 billion of nonperforming loans, which is causing significant instability in the banking sector, to the extend that the third largest Italian bank, Banca Monte dei Paschi di Siena, had to be nationalized by the Italian government, in a last-ditch effort to save it. As Forbes’ John Mauldin writes: “Estimates are that Italian banks may need €40 billion just to remain solvent.” This is what happens when a large percentage of businesses and individuals stop paying their debts.

In yet another surprising article, the Canadian Broadcasting Corporation published the opinion of Scott Reid, who served as Director of Communications to the former Canadian prime minister Paul Martin. In his article, Mr Reid mentions “Four reasons to despair about 2017”. And, while one might not agree with each and every one of his points of view, the mere fact that an article called “Think 2016 was bad? 2017 will be worse” was published by a mainstream media organization shows the changing point of view of people. It is becoming more and more difficult – after Brexit, Trump and the Italian referendum, among others, – for media to ignore the dissatisfaction of ordinary people and the hopelessness of many young Canadians.

Canadians are dissatisfied with the reality of low-paying, part-time, precarious employment. One way to deal with this is having as little debt as possible, and trying to be as self-sustainable as possible. Having lived through tough times, I realized that surviving is not always about how much you make, it is about how much you spend and how much you owe. It can make the difference between living, relatively good, through the difficult periods, or struggling and even losing everything.

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