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The Economy – a few thoughts

October 28, 2022

The economy has been under pressure for decades, I do not remember a time in my life when things were ever truly balanced.  We seem to move from one man-made crisis to the next.  The two economic factors we have always been able to count on are excessive taxation and a tremendous, and insidiously growing, disparity between incomes and expenses.

Successive governments fudge numbers to try to curry favour from voters and nowhere is this more evident that among today’s recession deniers.  On both sides of our country’s border, politicians are trying to redefine what a recession is.  The fact remains that increases and decreases in GDP are not indicative of the impact that economic woes have on family finances.

Higher Interest:

We have some very challenging times ahead, as interest rates are poised to continue increasing.  The Fed, in the USA, is looking towards an overnight rate of around 5%, while we are currently sitting at 3.75% in this country.  Canada does not have the economic strength, or stability, to carve out an independent path to a balanced economy.  In all likelihood we will, as we always have, follow in lock step with the Fed.

More Insolvencies?

We can anticipate further consumer debt growth as people struggle to salvage something from the collapsing housing bubble and massive mortgage debts.  Repeated consolidations and continued use of unsecured debt, such as credit cards and lines of credit, expose many consumers to the possibility of filing an insolvency – nonetheless, we are predicting that there will be no tsunami of insolvency filings. 

Back in 2020, as the lockdowns were being implemented, most of our industry colleagues were predicting a tsunami of filings – but we correctly identified the opposite would be the case.  In fact, for the last three years insolvency rates have fallen to about 30% – 40% less that prior levels.  As we stare into our crystal ball, towards the next year, we foresee a return to normal insolvency filing levels and possibly a very slight uptick.

For several years a national LIT firm has been predicting increased insolvency filings, through its surveys of the market place, their formula has changed little with each iteration, suggesting that (now) up to 53% of Canadians are cusping on insolvency.  The company’s survey team appears obsessed with the notion that folks “are $200 or less away from not being able to meet all of their monthly bills and debt obligations.”

Many credit card users are insolvent and regularly use one form of credit to pay another, a strategy that masks the depth of debt problems in this country.  For the past few years, homeowners have had the illusion of equity in real property and have been able to refinance unsecured debt into mortgage debt.  Freed up credit limits have allowed to slowly crawl back into debt.

Credit Card Use:

Based on the trajectory of credit card usage from the last reported, Canadian Bankers Association, data we anticipate that Canadians are charging more than $600 billion on credit cards each year.  Although the Association claims that as many as 70% of cardholders pay their balances in full each month, that suggestion is not really accurate.  The statement dates and payment due dates on most bank issued credit cards are two weeks apart – if one were to pay the full statement balance off, they are half a month deep in debt at the time that happens.

Gasoline and Fuel Prices:

Gasoline prices have skyrocketed, and oil supplies have been suppressed by both OPEC and radical left leaning government policies.  In Canada, fuel taxes are extremely high and constitute a significant portion of the price at the pump.  Fossil fuels, like it or not, are very important to thriving and growing economies and a lack of access to reasonably priced fuel is an impediment to economic stability and growth.  Currently we are paying around $1.80 per liter for gasoline and more than $2.00 for diesel.  It seems likely that unless governments reverse many of their radical policies, we could see gasoline hitting $3.00 – $4.00 per liter by next summer.

It has been reported that the USA is running out of diesel as a result of radical left wing policies.  The implications for Canadians are immense – we rely on transport trucks to bring food and many other supplies across borders from southern countries.  As a result, we will likely face food shortages and shortages of materials and finished goods.  Costs will rise and so will the use of debt.  It is entirely likely that in the face of limited access to materials, manufacturing will decline, and layoffs will abound.

Statistics:

We can try to pretend that all of this was incidental, or accidental, but it should, by now, be evident that radical left wing politics are largely responsible for the decline of our economy.  This country has never been so divided, as under the current government, and Canadians have never carried so much debt and lost so much money in investments, savings, and equity.  In 2017 we warned about liquidating RRSPs to purchase real estate. 

If memory serves correctly, in the Oliver Stone movie “JFK” the star Kevin Costner said something to the effect that “Theoretical physics can also prove that an elephant can hang off a cliff with its tail tied to a daisy”.  And we see that idea played out with statistics on Canadians savings.  Many consumers have collapsed RRSPs, according to the article linked in our blog article (also linked above), in 2013 some 1.3 million Canadians took money out of their RRSPs.  Statistically many RRSP withdrawals are not counted as liquidations – certainly that is the case for liquidating an RRSP for a homebuyer’s plan (“HBP”).

RRSPs and HBPs:

Some first time homebuyers are drawing down money from RRSPs to convert to HBPs, which may sound like a good idea at the time, but as we have blogged in the past this strategy simply creates more debt.  It also creates the illusion of wealth – from the perspective of the CRA at least – when you take money from an RRSP for a HBP even though there may be nothing left in the RRSP, the RRSP is still deemed to exist.  That may sound a little confusing but let’s break it down a little further.

If you withdraw the maximum amount of $35,000 from your own RRSP to convert to a HBP the fund is effectively collapsed.  But in order to avoid the tax consequences of withdrawing funds the same amount withdrawn must be repaid into the fund over the next fifteen years.  Effectively that creates a debt requiring payments of almost $200 per month for the next fifteen years.  If, at the end of each year, $2,335 is not recontributed to the RRSP the amount not recontributed is deemed to have been withdrawn and it becomes subject to taxation. 

This situation is exacerbated by RRSP loans – some first time homebuyers have borrowed money through an RRSP loan to set up the RRSP in the first place.  For these folks, they incurred three debts in buying their home, they owe an RRSP loan to the bank, they owe the amount withdrawn from the RRSP and they owe on the mortgage.  Ironically, faced with filing an insolvency proceeding the debt to the RRSP doesn’t go away.  Since the CRA deems the amount withdrawn to be repayable over the next fifteen years, the consumer must either repay the money to the RRSP, with no forward tax benefit, or pay taxes on the amount withdrawn in each subsequent year.  Although for statistical purposes the RRSP still exists, the savings are effectively replaced with a long term liability (debt).

The bottom line is that Government reports of Canadian savings and net worth are exaggerated and do not reflect the serious financial challenges that are being faced.  Meanwhile debt levels are higher than they have ever been.  If you or someone you know need(s) to address challenging debt problems call us at 519-646-2222, we can help!