22 January 2009

The Culture of Canadian Frugality...

Low debt load will help us weather recession

It can't save us from recession, but it will certainly reduce the pain. Canada's low debt burden - among governments, businesses and households alike - gives the country a crucial advantage as it heads into what threatens to be a long haul. Backed up by stability in the banking system that has become the envy of many countries, the Canadian advantage is solid enough that even the global recession and financial crisis can't destroy it. “The advantage is fundamental. It's not cyclical,” said Sherry Cooper, chief economist at BMO Nesbitt Burns. “Nobody can take away the fact that Canadians are far less burdened,” both compared with other countries, especially the US, and compared with their own past. At the heart of the global recession is the fact that the US government, financial institutions, households and companies lived way beyond their means for a long time. The effects of too much debt are being felt everywhere. But since Canada's governments, financial institutions, households and companies aren't facing the same high debt problems, the country doesn't have to fix those problems to muddle through. “So much of what is happening in the United States is because of the credit freeze. There's no comparison here. Canada is in a far better condition,” Cooper said. The Canadian economy can't go so far as to claim it's not being “bothered” by the global recession. After all, it is contracting, too. The pain is mounting in many industries, and the ranks of the unemployed are growing. Recovery is a long way off. But Canada's reduced exposure to the unseemly debt loads at the heart of the crisis will stand us in good stead, economists say.

The most obvious Canadian advantage is government debt load. After fighting down the deficit in the 1990s, the federal government has been able to pay off more than $100B in debt in the past decade, and most provinces have vastly improved their books as well. Not so in the rest of the world. The US deficit has ballooned and Japan's is enormous. While most European countries have kept their debts under control, Canada's total debt burden is still lower. As Ottawa and the provinces ready themselves to spend billions in an attempt to mitigate the recession, Canada can well afford to do so. “The debt [burden] gives us lots of room to manoeuvre. This is the time to raise it,” said Andrew Sharpe, executive director of the Centre for the Study of Living Standards. “We've built up this big advantage, so let's use it. But wisely.” The Canadian banking sector has also gained international recognition for its ingrained conservatism. While major banks around the world have toppled and have required government bailouts, Canadian banks remain somewhat profitable and well capitalized. Unlike their global competitors, they are still lending, and are able to raise money in financial markets, albeit at steep prices. The corporate sector, as a whole, has been equally thrifty and conservative. Debt levels are low, and companies generally have high cash balances at the ready - useful for plugging holes due to sudden collapses in revenue that could well hit in the next few quarters. As corporate income surged over the past few years, economists were worried that Canadian companies weren't putting their newfound bounty to good use, by leveraging it for further expansion. Now, the companies' tight fists seem to be paying off. Canadian consumers have shown a similar conservative attitude toward debt. While US homeowners were using their houses as ABMs, and buying homes with spurious loans, Canada also experienced a housing boom and embraced the US practice of borrowing against our houses to finance consumption. But mortgages here were not nearly as high risk. Housing prices are now falling, but not to the extent as in the US or Britain.
(Globe and Mail 090122)

Canada has always been the voice of moderation and reason, internally and internationally. What in our culture makes this such a fundamental virtue of being Canadian? First of all, we're not as rich as some others and know that saving for a rainy day is something still somewhat admirable. We also plan ahead...the fact that if you're caught unprepared in our climate, you could potentially die does not go unheeded; in fact, I think it is deeply embedded in our collective psyche. I think that's where the frugality comes from. We may not be the life of the party acting like there's no tomorrow when times are good, but we also avoid the worst of the hangover when reality comes crashing down on us the following day, and have enough of our faculties to properly clean up the mess because we planned ahead a little bit!

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