The Importance Of Debt In Canada

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During the month of September of 2016, Canada accomplished a dubious economic achievement. For the first time in its history, the amount of debt held by Canadians surpassed the amount of output, or Gross Domestic Product, the country produced (Isfeld 1). This increase of personal debt, leading to Canada surpassing 100 per cent of debt relative to GDP, corresponds with the low interest rates that have been offered to consumers since the ‘Great Recession’ to stimulate growth (1). Underpinned by the rising price of housing in major Canadian cities, this development has led to additional borrowing by Canadian households to pay off mortgages and home loans (Younglai 2).
To better understand the causes and consequences of Canada’s increased reliance
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Jackson notes that “… As long as the value of homes continued to rise, people’s financial liabilities (home loans) were offset by the value of their physical assets (homes). Problems arise when house values collapse. Liabilities are no longer balanced by assets… [therefore] financial stability turns out to be dependent in an unsustainable way on growth – in this case growth in the housing market” (Jackson 23). Therefore, the sustainability of the increased debt taken on by Canadians to finance their homes is greatly at risk if the current housing market ever declines. If this occurs, much of the wealth accumulated through the growth of the housing market would become obsolete, resulting in the loss in asset value of people’s homes, and the inability for Canadians to pay off their debts. The unsustainability of Canada’s reliance on growth in the housing market is an even further cause for concern, considering that a burst, resulting in a 47 percent decrease in housing price could eliminate almost all of the country’s consumer wealth (Canadian Household Debt Bigger than National Output 2). This is due to Canada dependence on the housing market, with real estate constituting half of all GDP growth in major Canadian provinces …show more content…
In Jackson’s conception of George Soros’ ‘Super Bubble’, he explains the irresponsible nature of systemic policies put in place prior to the 2008 financial crisis. The goal of these policies was to further economic growth, and as Jackson explains, led to the weakening of financial markets. For example, prior to the global financial crisis “… economic policies to increase liquidity as a way of stimulating demand [were introduced, including:]...loosening restraints on the US Federal Reserve,[and] de-regulating financial markets…Their overriding aim was to promote economic growth. In other words, the market… was undone by growth itself” (Jackson 26). Therefore, these policies that aimed at the system-wide deregulation of the financial markets – in order to induce growth – ended up being the root cause of the 2008 financial crisis. Although in Canada’s case, the debt crisis cannot be linked to explicit policies of market deregulation, the same logic can apply. The Bank of Canada systemically impacts the financial markets when they lower interest rates, as it affects banks, businesses, and consumer’s cost of borrowing. By lowering interest rates, the Bank of Canada hopes to stimulate growth by providing the market with greater liquidity. But it is with this greater liquidity, in the hope of continuation of economic growth that is

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