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THREAD. MUSINGS ON THE ECONOMIC SHUTDOWN, THE ORGANIC CONSUMER DEBT BUILDUP VS COVID-RELATED, ETC.
A long-term low interest rate environment in Canada has done what it was originally supposed to do: stimulate consumer spending and boost the economy. The origins were 1/
A long-term low interest rate environment in Canada has done what it was originally supposed to do: stimulate consumer spending and boost the economy. The origins were 1/
in and around the post-2008/09 Great Recession. This coincided with a run of insolvency filings which peaked in 2009/10, then fell rather steeply away. The 2010s brought an unprecedented run of real estate activity, especially in urban centres. Rates stayed low. Consumers 2/
kept up their spending blitz, driven by factors beyond simply relating it to low rates: increasing costs of living, stagnating wages and a habit of utilizing easily available credit to both make ends meet and ‘afford’ things otherwise unaffordable via monthly cashflow. 3/
In mid-decade, Canada was probably already bubbled up enough in consumer credit to have warranted another run of credit reckoning, but it didn’t happen. Rates stayed ultra-low and the FOMO took hold, with many youngish people scrambling to get into a real estate market 4/
at almost any cost. Downpayments were available via parents whose homes were recently even more flush with equity. Banks forked it over, fought over new customers & those who were habitually shifting balances to stay solvent. In other words, the low rate environment itself 5/
didn’t explain it all: it needed help, and it got it. In January 2019, insolvency filings started rising rapidly & consistently. For the next 14 months, consumer and business filings kept growing, such that about 9 out of those 14 months were double-digit growth and many 6/
trustees saw record filings months within that timeframe. Fastforward to March 2020 and the modern pandemic & accompanying economic shutdown. Essentially, it threw gasoline on a bonfire of a prolonged, organic consumer debt bubble. There is now a pause, a ‘deep breath before 7/
the plunge’ (Gandalf, Istari order, Maiar of Valinor), in which we expect insolvency filings to increase dramatically at some stage due to the widespread nature of the economic disaster. These filings will alter toward homeowners disproportionately to what otherwise would have 8/
occurred naturally, b/c massive & sudden job losses are much more ‘democratic’ in terms of renters & homeowners. Homeowners normally have a lot more financial runway between when they first get into debt trouble & when they need to consider a legal insolvency proceeding, but 9/
many who otherwise would NOT have had to file will need to. Watch this space. - FIN
