Personal Debt, Low Interest Rates, and Mark Carney’s Advice

   Prophet without honour . . . 

           “Now Jesus himself had pointed out that a prophet has no honour in his own country” (John 4:44).  I think that goes double when the country in question is Canada.  We Canadians tend to overlook the stars among us until they make it big on the international stage – at which point we’re very eager to point out that they’re Canadian.
One such bright light is Mark Carney.  He became governor of the Bank of Canada in February of 2008.  At that time, I had my head deeply buried in the sand when it came to all matters financial – whether personal, national, or international – so I couldn’t even have told you who Carney was when he took on the post.  Since I’ve been on a focused path to debt reduction, however, my awareness of the financial landscape has developed significantly.   So Carney has my attention.  Canada has done well, relative to other nations, in the face of the economic crisis of the past several years.  And while we can’t give Carney all of the credit for this fact, the general consensus is that he’s entitled to a great deal of it.

Prepare for a “brutal reckoning”

For years, Mark Carney has advised Canadians to rein in our personal debt.  He has cautioned us not to get sucked into the temptation to borrow more simply because interest rates are low.  “Low rates today do not necessarily mean low rates tomorrow,” he said just over two years ago.  “Risk reversals . . . can be fierce:  the greater the complacency, the more brutal the reckoning” (Alini).  Despite the warning, Canadians have continued to borrow more and more, our average debt-to-income ratio reaching a record high of 164.6 % by the end of 2012 (Beltrame).
But now, Carney has been recognized on the international stage.  This year, he will leave Canada to become “the first non-Brit to be named governor of the Bank of England in the storied institution’s 318-year history. Chancellor of the Exchequer George Osborne called the Canadian the ‘outstanding central banker of his generation’” (Beltrame).  With Carney’s international status as a financial rock star established, will Canadians start to listen to him?

Low interest rates → spending?

I’m not sure.  An article appeared in the Ottawa Citizen just last week entitled “Spend, Baby, Spend:  Policymakers Want Us To Cut Debt, Yet Make It Too Good Not To Borrow”.  In it, Terence Corcoran writes, with regards to Canadians’ record high levels of debt, “The official answer, from Bank of Canada governor Mark Carney on down, is Canadians need to start thinking about paying down that debt . . . Carney is essentially instructing Canadians to behave irrationally in the face of market signals, especially the 1% interest rate signal the Bank of Canada has sent since 2010.”  In other words, interest rates are still low, so of course we will keep borrowing, no matter what Carney advises.

Low interest rates → great debt-reduction opportunity

For those who see low interest rates as rationally leading to more borrowing, here’s an alternative thought:  Low interest rates make it relatively easy to pay down debt.  Yes, on their own, low interest rates do invite borrowing, but we have record levels of personal debt added to the mix, as well as a warning from our financial superstar that interest rates will go up.  I don’t like to believe that people are automatons – that we are programmed if interest rates are low, automatically to borrow.  I believe we are capable of taking in all aspects of our situation – to balance against current low rates the unprecedented size of our debts and the fact that the rates won’t last.  We have to consider what will happen when they rise by one or two percentage points.  How many hundreds of dollars per month will it add to each of our regular debt repayments?  Carney has warned us against complacency.  It makes sense to use the low interest rates of today to tackle our mammoth debts so that higher rates won’t become the instruments of a brutal reckoning tomorrow.
Canadians will be saying good-bye to Mark Carney in a few months, and Canada’s loss will be England’s gain.  Given his record and his status, his advice is worth heeding.  Don’t wait for Carney to save Britain’s economy before we listen to him.  Let’s benefit from the advice of our financial prophet while he’s still in his own country. 

Alini, Erica. “Econowatch.” Household Debt and the Bank of Canada’s Anxiety
Levels in a Graph Comments.  11 Apr. 2012. Web. 15 Feb. 2013.  http://www2.macleans.
Beltrame, Julian. “A Year in the Spotlight for Mark Carney.” The Calgary Herald. 2 Jan. 2013.
Web. 11 Feb. 2013. < +Carney/7764641/story.html>.
Corcoran, Terence. “Spend, Baby, Spend: Policymakers Want Us To Cut Debt, Yet Make It Too
Good Not To Borrow.”  5 Feb. 2013. Web. 15 Feb. 2013.
< Baby Spend/7917865/story.html>.

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