# Can someone please explain how can debt to income ration be so high in Canada?



## Damien (May 30, 2013)

I don't understand if the average household debt to income is 160% doesn't that mean that people have to default on their debt payments each year? or do they just pay their bills with other credit cards hoping that their salaries will catch up in the future?
Or am I misinterpreting the ratio?


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## Charlie (May 20, 2011)

It's total debt compared to one year's income. 

Most people starting out with a new mortgage would have a debt to income ratio well in excess of 100% (likely more then 200 or 300%) and could be in solid financial shape


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## Echo (Apr 1, 2011)

The ratio lumps in consumer debt, which you shouldn't have - or should pay off immediately - with mortgage debt, which is designed to be paid off over 20-25 years. I don't find it a very useful metric on an individual level.


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## james4beach (Nov 15, 2012)

It's the low interest rates -- and the wonderful Mr. Carney at the Bank of Canada -- that made all of this possible.

When you have such low interest rates the debt servicing cost is very low, so you can "comfortably" take on larger debt.

It's really not the total level of debt that matters. All that matters is the cashflow from wages, versus the cashflow needed to pay for all your loans. So the two things that can burst Canada's credit bubble are a rise in unemployment, and/or higher interest rates.

P.S. interest rates have shot up quite a bit in the last month


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## sags (May 15, 2010)

Even with mortgage debt removed, Canadians have a high level of consumer debt.

If it is good or bad, depends on what the debt is for, I would think.

If a person owns a lot of assets and owes half the value of each of them.........it would not be as bad as if someone owes credit card debt and has nothing to show for it.

But, according to Trans Union credit reporting agency..........there has been a noticeable trend.

Load up the credit cards (spending more than one earns), and then transfer the debt to a line of credit secured against a home.

For the past few years, it was easy to do..........as home prices rose and the banks were only too happy to extend higher limits on credit lines.

It looks like that has come to an abrupt halt though. Credit lines aren't as easy to obtain or increase as they were, and interest rates are going slowly up, almost every week now.

What happens now is anyone's guess. Consumers will be forced to start actually paying down their debt.......and the money will have to come from somewhere. In the US, consumers found out the hard way that the banks are much more interested in protecting themselves than helping out their indebted clients. They cut off access to credit for a lot of people.........and it resulted in a recession.

Discretionary spending most likely would be where people would have to cut.........dining out, travel, kids activities, keeping the old car a few more years...................

Or........maybe.......we will start seeing some actual wage increases. That would be a welcome change.


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## HaroldCrump (Jun 10, 2009)

james4beach said:


> When you have such low interest rates the debt servicing cost is very low, so you can "comfortably" take on larger debt.


And therein lies the danger.
This ostensible comfort has a *huge* opportunity cost.
It is re-directing productive capital away from investment in retirement, education, etc.
Instead of buying more junk i.e. 52" LCD Plasma TVs, latest iPhone 5S, latest BMW Z3, etc. part of these funds can be invested into post secondary education, reducing the need for student loans and govt. subsidies (OSAP, etc.)
Part of it can be investment into retirement accounts (RRSP, TFSA, etc.).

It is pathetic that Canadians have millions (billions?) in unused RRSP room, while at the same time we have 164% consumer debt.


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## Rusty O'Toole (Feb 1, 2012)

These days someone could very easily have an income of $50,000 a year and owe $80,000 on car loans, furniture loans, credit cards, and other consumer debt. In fact the higher the income the more debt a person can carry. It does not have to be paid off every year, today you can get a car loan for up to 7 years, even on a used car. This seems incredible to me but it is true. And if you make the minimum payment on your credit cards you may never get them paid off.

So, it is quite possible to owe that much or more. Whether it is smart financial planning is a separate question.


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## Damien (May 30, 2013)

Everywhere I look I seem to see the following definition of debt to income ratio:

"To calculate your debt-to-income ratio, *add up all your recurring monthly payments (rent or mortgage payments, home insurance, taxes, car payments, credit card payments, student loans, etc.)* and divide the total by your net monthly income, including any monthly investment income you get."

http://www.desjardins.com/en/coopmoi/credit-endettement/conseils/calculer-ratio-endettement.jsp

So according to the above, its not "total" debt, but rather monthly cash flow. So in accordance with the above, the 160% debt to income ratio can only be true if for example I make 1,000 in income net of tax and pay 1,600 in debt each month.


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## Sampson (Apr 3, 2009)

Charlie's definition is the one used by Stats Can definition.

The one you link to is more accurately referred to as the "Total Debt Service Ratio" - referring to debt payments to net income.


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## Damien (May 30, 2013)

Sampson said:


> Charlie's definition is the one used by Stats Can definition.
> 
> The one you link to is more accurately referred to as the "Total Debt Service Ratio" - referring to debt payments to net income.


ok perfect thanks, that makes more sense.


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## sags (May 15, 2010)

When the sales person, financial adviser, mortgage broker, lawyer........are done with their lengthy presentations........

The couple aroused from their slumber and asked the only question on their mind............"so, how much is it a month"?

The indoctrination has been successful and complete.


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## Potato (Apr 3, 2009)

It's a population measure so it's not directly analogous to an individual's situation. It's the ratio of the average debt to the average disposable income, composed of young people with big mortgages and education debt (who may be at say 400%) and people a year away from retirement at peak earnings with no debt (at 0%). As an isolated number it doesn't carry much meaning, what is important is how the reading changes over time -- it's ~160% now, and crossed the 100% mark in the late 90's. So debt has been increasing at a fairly rapid rate over the last decade or two, even adjusted for wage growth. If you consider the aging population this is even more alarming: we would have _expected _debt-to-income to _decrease _over that time, yet the opposite has occurred. So younger Canadians are more indebted than their parents were at that age, or older people are carrying larger debts longer, or some combination thereof.


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## Hawkdog (Oct 26, 2012)

There are lots of 20 somethings out there that land a good new job and then go out on a spending spree.
This would be particularly true in the oil patch or mining industry.
Just looked at all the jacked up and fancy trucks in Alberta.
20 years old and they make 100,000 plus a year
In my industry i used to work with guys that would spend 500 buck each on a night at the bar, they would have an 75000 truck, a new sled, an on and on
when you see that its easy to understand


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## jserrg (Apr 17, 2013)

Increasing “Debt to Income” ratio is only an indication of rising real estate prices. 20 years ago average mortgage was (I am guessing, correct me if I am wrong) 60-80K. Today’s average mortgage is probably 3-4 times larger. Everybody is pushed to take on more debt in the form of larger mortgages.
I would be interested to learn if there is commonly used “Debt to Income” ratio that excludes mortgages. Anybody knows a name?
And of course old men will always complain about young generation spending money in the bars. Of course they didn’t have bars back then.


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## avrex (Nov 14, 2010)

Canadians may carry a lot of debt but that isn’t always a bad thing (Nov 11, 2013)

The theme of the above article states that, on an individual basis, it's ok to have a high personal debt-to-disposable-income ratio.
I would conditionally agree with this statement. i.e. For those Canadians that are younger with student loans or home mortgage that they are diligently paying off.

However, the problem is that the Canadian *average* for this ratio is *163.4%.*

Potato nailed it above when he stated,


Potato said:


> If you consider the aging population this is even more alarming: we would have _expected _debt-to-income to _decrease _over that time, yet the opposite has occurred.


Are many Canadians in trouble? I think so.


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## andrewf (Mar 1, 2010)

The amount of debt is not really so important as the distribution. An economy gets into trouble when large numbers of people become insolvent. This can happen even with low average debt levels.


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## james4beach (Nov 15, 2012)

Getting back to the original question of why the debt-to-income ratio is so high...

There's another part of this that generally goes unmentioned in the media. It's that real incomes have been stagnant in Canada & USA for a very long time... peoples incomes are not going up, and haven't been for a while. There are only two ways to pay for your daily needs: income, and debt. When wages prove to be insufficient to pay for lifestyle, people take on more debt.

To me the high debt to income ratio partially illustrates declining wealth in the West. Real wage growth isn't happening (could also be due to inflation being higher than official reports), so people take on more debt.


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## james4beach (Nov 15, 2012)

Potato said:


> the reading changes over time -- it's ~160% now, and crossed the 100% mark in the late 90's


Notice that it crossed that 100% mark in the late 90s, right at the time that western manufacturing crumbled and disappeared and globalization started rapidly killing high paying Canadian/American jobs. Go visit those old manufacturing cities in Ontario like Kitchener, Oshawa etc and see first hand how Canadian incomes plummeted.

Yes the high debt/income ratio is partially illustrating lavish lifestyles and how people live beyond their means, but I think the more critical underlying reason is that Western wealth rapidly declined around the turn of the century (along with decimation of domestic production), stagnant wages, and nonexistent wage growth.

We no longer live in the wealthy times of 1980-2000. Everything changed around the turn of the century, and the soaring debt-to-income ratio (and negative savings rate of course) illustrate this.


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## alingva (Aug 17, 2013)

Take a look at this infographic. People spend before they even earn.


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## alingva (Aug 17, 2013)

avrex said:


> Are many Canadians in trouble? I think so.


 Unfortunately this is not Facebook and I cannot give you LIKE


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## HaroldCrump (Jun 10, 2009)

Many of these debt numbers - very conveniently - speak of "non mortgage debt".
IMHO, that is very misleading.
Is mortgage debt not a debt?

I know, it is secured against the property, and house prices always go up. Of course :rolleyes2:

But it still has to be paid. Out of after-tax income.

Mortgage debt is factored out because - scary as the numbers may be _without_ mortgage debt - once included, the numbers are truly a horror show.

The principal and the interest payments are not coming out of thin air.
They are coming at the expense of other priorities of life, such as retirement saving.


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## marina628 (Dec 14, 2010)

I agree with you Harold but they probably assume house can be sold and wipe out debt.


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## Eclectic12 (Oct 20, 2010)

marina628 said:


> I agree with you Harold but they probably assume house can be sold and wipe out debt.


Maybe not wipe out the debt .... but compared to a lot of other debt, on average I suspect there's a lot more value left compare to a lot of other debt.


Cheers


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## jserrg (Apr 17, 2013)

I personally think that increased income to debt ratio is only caused by twisting statistic numbers.

I don't overspend myself. My only debt is my mortgage. I don't have any friends who overspend. Yes, there will always be some stupidity and some people are spending more than they earn. But I think these are exceptions. There are much more smart people who know how much they earn and consequently how much they can spend. 

We are not stupid. We just happen to have large mortgages which makes that debt to income ratio go through the roof. This is a serious problem by itself. I realize that. But it has nothing to do with how much I spend on day-to-day purchases every month. It is just that houses are too expensive nowadays.


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## andrewf (Mar 1, 2010)

Proof by anecdote!

Non-mortgage borrowing is also rising as a share of GDP.


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## JamJam23 (Nov 8, 2013)

jserrg said:


> I personally think that increased income to debt ratio is only caused by twisting statistic numbers.
> 
> I don't overspend myself. My only debt is my mortgage. I don't have any friends who overspend. Yes, there will always be some stupidity and some people are spending more than they earn. But I think these are exceptions. There are much more smart people who know how much they earn and consequently how much they can spend.
> 
> We are not stupid. We just happen to have large mortgages which makes that debt to income ratio go through the roof. This is a serious problem by itself. I realize that. But it has nothing to do with how much I spend on day-to-day purchases every month. It is just that houses are too expensive nowadays.


This is why they generally don't include mortgage debt in the calculations. I believe I read that the average "consumer debt", credit cards, line's of credit, etc.. was about $25k


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## Pluto (Sep 12, 2013)

I find would find the ratio more useful if they would break the debt part down into types of debt. Supposing someone gets a big mortgage to buy a house, then they rent out a suite that covers the mortgage. Why would any one worry about their debt? On the other hand, supposing the debt is to buy depreciating assets like TV's, cars, unneeded suits, and so on, that's a worry. 

To me, the right kind of debt is good, namely, debt to start a viable business.


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## KaeJS (Sep 28, 2010)

Technically speaking,

My personal debt to income ratio is 435%.

The only debt I have is a mortgage with a loan amount of 175k. House is fully furnished and I have 2 cars that are paid off.

If my salary/interest rates never changed, my house would be completely paid off by 2033 without altering my lifestyle.

I would be only 43 years old.

That should tell you how useful this metric is.


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## Rusty O'Toole (Feb 1, 2012)

Debt should be offset by assets to get a true picture. A $200,000 mortgage against a $350,000 house is quite a different thing from $200,000 in consumer debt representing 3 second hand cars, several closets full of clothes that are no longer in fashion, and a handful of bar receipts and vacation snaps.


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## lightcycle (Mar 24, 2012)

HaroldCrump said:


> Is mortgage debt not a debt?
> [..]
> The principal and the interest payments are not coming out of thin air.
> They are coming at the expense of other priorities of life, such as retirement saving.


Also, in the same vein: margin debt.

Both could indicate an over-exposure to market conditions and exacerbate any precipitous downturns.


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## james4beach (Nov 15, 2012)

HaroldCrump said:


> Many of these debt numbers - very conveniently - speak of "non mortgage debt".
> IMHO, that is very misleading.
> Is mortgage debt not a debt?


I'm with you Harold. Mortgage debt is excluded because the numbers are truly horrendous. It is a debt, and even though it's secured it's against an illiquid asset so it's not the kind of debt someone can walk away from in the blink of an eye.

They also probably exclude it from the ratios because it reveals just how unaffordable home prices are, and again, how low incomes are


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## HaroldCrump (Jun 10, 2009)

The record high R/E prices and the record low contribution rates to retirement plans like RRSP are two sides of the same coin.
The monies that could have done into financing retirement are going towards paying historically high home prices.

Focusing on the "monthly payment" is very misleading.


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## james4beach (Nov 15, 2012)

Are you getting a sense now why I'm so bearish on the economy and the banks (who lend money to everyone)? People are not well off. They are highly in debt, insufficient savings, no retirement money, and barely making ends meet even while they're still employed. Everyone, including banks, have simply leveraged up and this creates the illusion of great wealth in society (big homes, big cars) even though it's supported by very little.


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## wendi1 (Oct 2, 2013)

Rusty is correct. The correct number to compare to net income is NET non-mortgage liabilities (subtract non-mortgage assets).

A side effect of low interest rates is that is tempting to borrow even if you don't have to. That new car that you have the cash to pay for might be on a 0% loan. If the loan were 10%, you would be more likely to pay cash for it (and it would not show up in Stats Canada's numbers).

As well, there is no distinction in these numbers between "good debt" (like student loans) and terrible, life-crushing consumer debt.


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## DayTek (Sep 26, 2013)

I've worked in banking for the last 8 years. The biggest problem I've seen in client's finances are those who are apathetic to debt; They see it as part of life. And "saving" to people are deals on purchases...Not actual "rainy day" savings. Example: Someone will buy a new flat screen TV (purchased on credit to which they make minimum payments to) just because it was marked down $300 from $800. Then they will say, "I saved $500!". And I think, "No, you just went in the hole $500...With money that isn't even yours." It made me want to *facepalm* the first couple dozen times until I realized that, "Holy crap, a lot of people actually treat their finances this way..." The shock value wore off for me after a while.

Three things I believe should never be blamed for debt problems:

-Banks
-Credit card companies
-The Bank of Canada for the ridiculously low prime rate 

Why? Well, if you shoot yourself in the foot, does it really matter who put the loaded gun in front of you?

Starting a career in banking at 19 opened my eyes to the frightening effects of not taking *ownership* for one's finances. I am scared crapless to rely on credit for anything and always have an emergency fund ready. My husband and I only owe a mortgage and I can't wait until the day we see that at $0, hopefully before I'm 40! The Jones' can show off their debt-induced tangibles and I'll just keep saving and paying down the mortgage.


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## jserrg (Apr 17, 2013)

Exactly this conversatoin I had with my wife not long time ago: "How could you SAVE money by BUYING items on sale. When you BUY you SPEND. If you SPEND money - you don't SAVE. This is obvious to a ten year-old.

Banks exist to make money not to help people with their day-to-day financial needs. 
If you would manage a bank - your purpose as a CEO or VP would be to increase your bank's bottom line.

People should mind their own interest and be responsible.

I plan to pay off my mortgage by 40 as well.


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## lightcycle (Mar 24, 2012)

Most people who want to be millionaires don't really *want* a million dollars, they want to *spend* a million dollars.

That's the mainstream view of money and that's why we're seeing all these screwed up numbers on consumer debt and savings.


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## Nemo2 (Mar 1, 2012)

DayTek said:


> The Jones' can show off their debt-induced tangibles and I'll just keep saving and paying down the mortgage.


:encouragement: There are many of us out there......I recall mentioning The Jones' on a Boomer and Echo screed I submitted back in April, to the effect that _"We have zero inclination to keep up with the Jones’………in fact they’d probably have to find a high vantage point and use binoculars just to see us…"_


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## sags (May 15, 2010)

The question is "why is the debt to income ratio so high"

There are two parts to that question..........debt and income.

Most discussions focus on the debt side.........and ignore the reality that incomes have been stagnant for decades.


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## Cal (Jun 17, 2009)

Nemo2 said:


> :encouragement: There are many of us out there......I recall mentioning The Jones' on a Boomer and Echo screed I submitted back in April, to the effect that _"We have zero inclination to keep up with the Jones’………in fact they’d probably have to find a high vantage point and use binoculars just to see us…"_


Made me think of the book 'The Millionaire Next Door'.


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## My Own Advisor (Sep 24, 2012)

Sags has a great point. I don't see incomes going up as fast as RE has or anything close, across the board.


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## MoneyGal (Apr 24, 2009)

There is a tail-chasing quality to that conversation, though. Incomes in aggregate have not risen significantly, but that does not mean that all incomes are stagnant. I suspect there is tremendous diversion around the mean w/r/t to income growth in any period, and also in the period we are discussing now. *Should* all incomes, on average, rise, over all time periods? 

We argue (on this board) that CPI is not an accurate reflection of "what things actually cost." Why would we argue that average wage growth is an accurate reflection of how incomes change over time?


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## MoneyGal (Apr 24, 2009)

(p.s. I am not arguing that the middle class hasn't been significantly hollowed out over the past 20 years. Nor am I arguing that current wage or income dispersion is "right." I'm just commenting about averages.)


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## Rusty O'Toole (Feb 1, 2012)

" Someone will buy a new flat screen TV (purchased on credit to which they make minimum payments to) just because it was marked down $300 from $800. Then they will say, "I saved $500!". And I think, "No, you just went in the hole $500...With money that isn't even yours." It made me want to *facepalm* the first couple dozen times until I realized that, "Holy crap, a lot of people actually treat their finances this way..." The shock value wore off for me after a while."

You can save a lot of money buying things you don't want with money you don't have to impress people you don't like.


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## emperor (Jul 24, 2011)

What also confuses me is they say that inflation is low. Which means we should own more stuff for our additional debt but I don't see that. When I grew up everyone had a phone, a TV, a house, 1 - 2 vehicles and about 5 people owned land.

Now a days only about 20% of the people I know own a house everyone has a phone, computer, TV and a vehicle. No one I know has land any more.


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## jcgd (Oct 30, 2011)

sags said:


> The question is "why is the debt to income ratio so high"
> 
> There are two parts to that question..........debt and income.
> 
> Most discussions focus on the debt side.........and ignore the reality that incomes have been stagnant for decades.


Even with incomes stagnant, who determines how much money/ crap we are entitled to? My partner and I live off of around $32k per year, including university tuition for her, and she makes less than $8k per year gross. I net around $60k per year. So we make double what we require for what we consider a comfortable lifestyle. 

It would be nice to see less people in poverty, but I don't understand what makes people think we should all have enough money for stuff. If people choose to not buy things they don't need, and stop, or a reasonable after food, clothing, and housing, it doesn't take a heck of a lot to get by. IMO.


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## Daniel A. (Mar 20, 2011)

Prior to 1968 people had to have money to buy.

The introduction of Chargex now Visa as well as all the other credit cards is only something seen from the seventies onward.

Then in the eighties the bank industry decided that why pay for a car when we can lease to own.

Then we move to the nineties You can have a line of credit .

Just because a few dozen on this forum manage credit well just does not speak to the vast majority out there.


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## james4beach (Nov 15, 2012)

MoneyGal said:


> Incomes in aggregate have not risen significantly, but that does not mean that all incomes are stagnant. I suspect there is tremendous diversion around the mean w/r/t to income growth in any period, and also in the period we are discussing now.


I've seen the studies on the US economic rebound.

What it showed is that incomes of high income earners (top 5% or something like that) increased dramatically post financial crisis. We're talking people like lawyers, banksters, executives

However incomes of everyone else in the USA barely increased at all. Growth of wealth, and economic good times, are very much isolated to the richest people in society... not the average people. This is typical of our post-2000, chronic recession. Any "good times" disproportionately benefit the wealthiest segment of society, while everyone else (the majority of the population) get _nothing_.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> I've seen the studies on the US economic rebound ...
> 
> However incomes of everyone else in the USA barely increased at all. Growth of wealth, and economic good times, are very much isolated to the richest people in society... not the average people. This is typical of our post-2000, chronic recession. Any "good times" disproportionately benefit the wealthiest segment of society, while everyone else (the majority of the population) get _nothing_.


 ... and it's even more disturbing when one reads that some of those at the top, getting the big salary/bonus can be (or were) paid out by "borrowing" from the pension fund, with lip service to the idea of paying it back.


Cheers


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## sags (May 15, 2010)

Stock markets have done well, but most people don't participate in the markets. With the decline of DB pensions........even less people have any relationship to the stock markets. By and large, wealthy people invest in the markets and have basically been rewarded for having wealth.......by being given more wealth.

When the US housing market collapsed and prices fell, the average person had the financial rug pulled out from under them. For wealthy people, it became a buying opportunity. They bought at cheaper prices and may have rented them out to people who had lost their homes and all the wealth they had in the world.

Most people understand there is a growing inequality. Even billionaires have commented on it and the possible destructive outcomes.

The problem is in finding a solution to reverse the trend. 

Conservatives want to cut spending and taxes, and hope the results will be growth, higher demand for labor and rising wages.

Liberals want to continue government intervention to create jobs, and provide social programs for those at most risk. They hope the results will be growth, higher demand for labor and rising wages.

Which side is right........or even if either side is right.........is still to be determined.

One thing is certain. The status quo cannot continue in it's current trend, without severe social and political consequences.

In Canada, I read last week that Kelloggs is laying off people in their processing plant. People are eating about 50% of the breakfast cereal that they used to. Today, Heinz announced they were laying off 600 more people.

Grain prices have fallen from record highs, and oil from the Alberta oil sands is trading at a big discount from world oil. Oil companies are facing high production costs and declining revenues, and a hiring freeze has begun to take shape.

Our recovery looks tenuous at best. Too many "jobs" being created are low paid service jobs or temporary employment.

No politician seems to have a vision to propose going forward.

Maybe there is none to propose, and our standard of living will drift downwards until it finds a place to settle.........prices will adjust downwards in line with declining demand for products and services, and an equilibrium will be reached........but at a lower standard of living than we experienced in the past.


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## sags (May 15, 2010)

As someone once said.........deciding what the value of labor from someone else is worth, is fraught with problems.

Who is more valuable to me?

The plumber who comes over and fixes my drain............or the CEO of Apple, from whom I own no products?


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## james4beach (Nov 15, 2012)

I guess we're veering off topic but I find the disparity between executive pay and average workers pay really shocking.

The gap between CEO & top executive pay, versus average employees at the same company, has increased far above the historical average. Investors have to be aware of this too, as millions of dollars of investor money is getting paid out to executives, who are taking home very lavish compensation packages


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## alingva (Aug 17, 2013)

The whole system is created by debt, it cannot physically exist without debt, when you borrow you have to pay interest and principal back. Now think - every year you have more money in circulation because of the debt+interest because people borrow more and more (in many cases to pay previous debt). You can pay debt off only if your income grows faster than your interest is but it does not happen, annual interest rate of most debt is much higher than annual income growth

Unless something breaks in the system debt level has to go up and will go up.


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## Andrew (May 22, 2009)

I've always had suspicions that the debt to income ratio didn't really tell you anything.


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## fraser (May 15, 2010)

I blame the consumer, not the bank and not the retailer.

At the end of the day the consumer decides what to buy and how to buy it. We were able to avoid consumer debt, other than mortgages, for our entire lives. It was really very simple. We did not buy things that we could not afford. We would never think of going into debt for Christmas or buying that new sofa or TV on a 'pay later scheme'. 

It boggles my mind that people would incur consumer debt at high interest rates in order to buy a consumer good that depreciates faster than an automobile.

People need to take responsibility for their actions and their debt. They need to stop blaming others for their spending habits. Just live within your means. It is not a difficult concept.


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## HaroldCrump (Jun 10, 2009)

When speaking of debt, income, and spending, let us not forget the 800 lbs. elephant in the room - *taxes*.

We pay layers upon layers of taxes, some are transparent and obvious (such as income tax), while others are hidden, surreptitious, and often couched as "fees" (such as gas taxes, eco fees, surcharges, etc.)
Taxes take a huge bite out of the post-income tax disposable income for consumers.

Middle class families are in a constant struggle to make the best of the crumbs of disposable income left in their hands after paying layers and layers of taxes.

It is easy to wag our fingers self-righteously at people buying electronics, shoes, cars, and other consumer items.
But we should not forget that the single largest expense item for almost all individuals and households is taxes.
Far more than mortgage payments, retirement savings, or any amount of iPads, iPhones, Movado watches, Armani suits, etc.


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## lightcycle (Mar 24, 2012)

HaroldCrump said:


> or any amount of iPads, iPhones, Movado watches, Armani suits, etc.


Sales tax on non-necessities are entirely avoidable. Unfortunately for many, the above seem to count as necessities.


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## fraser (May 15, 2010)

I am not certain what taxes have to do with consumer credit. 

Taxes won't go away. They are a given.

This is about spending disposable income, and overspending disposable income. It is about people living within their incomes and not splashing out for items that they think they need or want, but cannot really afford.

Do you really think that people who are very prone to incurring consumer debt would actually incur less or no debt if their tax burden was reduced? I do not think so.

They would just spend more and more to the point where their additional debt service payments equaled any reduction in taxes/increase in disposable income.


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## HaroldCrump (Jun 10, 2009)

lightcycle said:


> Sales tax on non-necessities are entirely avoidable.


But non necessities are precisely what comprise "standard of living" vs. subsistence living.

What are necessities?
3/4th of the world lives on less than the equivalent of $2 USD a day.
Necessities can be a shoebox to live in, a fistful of rice and boiled beans.



> Unfortunately for many, the above seem to count as necessities.


I don't agree.
The definition and perception of necessities varies from country to country, region to region, individual to individual, historical period to another.


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## HaroldCrump (Jun 10, 2009)

fraser said:


> Taxes won't go away. They are a given.


Given by who?
By Moses in the tablet of Ten Commandments, brought down from Mount Sinai?

We bring the taxes upon ourselves by the choice of our votes.
It is in our power to change (collectively).



> This is about spending disposable income


If you define disposable income as after-income tax income, then you are ignoring a whole whack of retail taxes.
In some ways, retail taxes are more punitive and unavoidable than income taxes.

You can offset income taxes by using tax shelters like RRSP deductions.
The only way to avoid retail taxes is to live like a hermit crab.

Pl. note that I am not defending senseless, conspicuous consumer spending.
I am not advocating that type of consumer spending either.

I am saying that we should not ignore the role of taxes when we speak of disposable income, debt, and spending.
Tax determines "disposable income", tax is a big part of household budget, and tax increases the cost of retail spending.
In fact, the higher you are on the marginal tax bracket, the _worse_ your haircut is.
i.e. a $100 base item "costs" far more to someone in a higher income tax bracket than to someone lower.


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## lightcycle (Mar 24, 2012)

HaroldCrump said:


> The definition and perception of necessities varies from country to country, region to region, individual to individual, historical period to another.


I like this definition.

However, using it in the context of present-day Canada: iPhones, iPads, Movado watches and Armani suits are not necessities, and the sales tax incurred on purchasing these luxury items when one cannot afford the items in the first place exacerbates the debt problem we are discussing in this thread.


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## fraser (May 15, 2010)

Alberta has some of the lowest taxes in the country. And some of the highest consumer debt ratios, not only high, but increasing a faster rate than other jurisdictions.

Ask any banker or trustee. The consumer debt challenge is an issue for all income levels. It is not isolated to those with lower incomes. It is about spending more than you take home...whatever that amount is. Taxes simply do not play a part in it. This is about spend spend spend, not tax tax tax.


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## HaroldCrump (Jun 10, 2009)

lightcycle said:


> However, using it in the context of present-day Canada: iPhones, iPads, Movado watches and Armani suits are not necessities


I am not saying they are.
The % of HST is the same on all items (leaving aside a small number of items such as baby products, dairy, etc.).
There are a lot of items that can be (arguably) considered necessities, such as gasoline, hydro, non fancy clothes and so on.
There are several layers of taxes on these items.
For instance, gasoline has 3 layers of taxes.
Hydro has 2 or 3 layers (depending on province).

It is true, of course, that the more you consume, the more taxes you will end up paying.
It exacerbates the problem, as you said.
But unless we are talking about living like a hermit, taxes make up a big chunk of the difference between your top line and bottom line.

For any given level of consumption, lower taxes will mean more money left over for saving and thus lower debt.


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## fraser (May 15, 2010)

I just do not think that for those who have consumer debt challenges, that 'lower taxes will mean more money left over for saving and thus lower debt'. That is a daydream. Did consumer debt decrease or savings increase when the GST was reduced or when income tax in some provinces was reduced?

The challenge that these people have is that they spend every dime of disposable income that they have, and then some. That is their problem. 

Saving is just not something that resonates with these folks

Their primary interest is in shopping and minimum monthly payments.


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## lightcycle (Mar 24, 2012)

HaroldCrump said:


> But unless we are talking about living like a hermit, taxes make up a big chunk of the difference between your top line and bottom line.
> 
> For any given level of consumption, lower taxes will mean more money left over for saving and thus lower debt.


I don't agree.

Case in point, awhile ago a friend of mine told me he bought an XBOX on sale, $99 off. He told me he "made $99" on the purchase. I don't think he was joking...

For the general public, any kind of effective savings just goes towards more consumer debt.


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## Nemo2 (Mar 1, 2012)

fraser said:


> People need to take responsibility for their actions and their debt. They need to stop blaming others for their spending habits. Just live within your means. It is not a difficult concept.


+1


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## jc2011 (May 31, 2011)

fraser said:


> The challenge that these people have is that they spend every dime of disposable income that they have, and then some. That is their problem.
> 
> Saving is just not something that resonates with these folks
> 
> Their primary interest is in shopping and minimum monthly payments.


Agree, but is it sustainable the 1st world as it is now without this massive consumption? If everyone uses their iPads, iPhones, Galaxy's, BMW's, 42" TV's... until the day they fall to pieces, what's the future for Apple, Samsung, GM, Toyota...? These companies are always looking for new markets, what if consumption would be reduced now to just real "necessities"?


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## HaroldCrump (Jun 10, 2009)

fraser said:


> People need to take responsibility for their actions and their debt. They need to stop blaming others for their spending habits. Just live within your means.


I am simply trying to present a different view reg. the effect of taxation on household budgets.

It is the single largest expense item, by far.

The next item on the list are the record high prices of housing in Canada, pumped up and fueled by deliberate, conscious R/E pumping policies of our govt. in the last 6 - 7 years.

I am not being an apologist for senseless, conspicuous consumer spending.

I am saying that sometimes this type of self-righteous finger-wagging and pontificating (like we see on this thread) seems too much.
It is easy to judge other people by your own standards of frugality.


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## sags (May 15, 2010)

Wage stagnation and tax burdens have about the same result, I would think.

Consumers with less money to pay down old debt or to avoid the need for future debt.

Perhaps it is impossible to isolate one cause for rising personal debt loads...........because there are a combination of causes.

A perfect storm for debt creation.........so to speak.


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## HaroldCrump (Jun 10, 2009)

sags said:


> Wage stagnation and tax burdens have about the same result, I would think.


That is true.



> Consumers with less money to pay down old debt or to avoid the need for future debt.
> Perhaps it is impossible to isolate one cause for rising personal debt loads...........because there are a combination of causes.
> A perfect storm for debt creation.........so to speak.


Yup, and that was exactly my point that righteous finger wagging at the perceived consumption habits of some people does not tell the whole story.

It is like how up until a few months ago Carney and Jimbo were chiding and berating Canadians for taking on too much debt, yet exactly at the same time were loosening mortgage rules, expanding the CMHC's balance sheet, keeping interest rates low, and buying up all the collateralized mortgage securities from the banks.


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## james4beach (Nov 15, 2012)

HaroldCrump said:


> It is like how up until a few months ago Carney and Jimbo were chiding and berating Canadians for taking on too much debt, yet exactly at the same time were loosening mortgage rules, expanding the CMHC's balance sheet, keeping interest rates low, and buying up all the collateralized mortgage securities from the banks.


I always laughed at that too. You have Carney, who slashed the Bank of Canada policy rates to historical lows, the biggest motivator to take on debt and _avoid_ building savings. Then he speaks out the other side of his mouth and says tsk tsk don't take on so much debt every one.

What a clown. Both these guys worked hard to pump up the Canadian real estate market and consumer debt, and then try to cover their butts by saying "don't take on so much debt". The government expanded CMHC's balance sheet to $800 billion or something, massive expansion in mortgages!


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## sags (May 15, 2010)

When TARP was first announced, and other government stimulus programs were announced...........there was a lot of discussion on the negative long term affects of such measures.

We don't hear much about that anymore. The business media is fully on board for more stimulus........stimulus forever, and nobody seems to think it matters anymore.

Maybe there has been a seismic shift in economic theory..........or maybe it was wrong to start with............or maybe we will find out it is all a house of cards and will pay for it someday.

Anyone who predicts "dire" things from all the central bank activity is labelled..........Dr. Doom or some other moniker, and are brought in for panel discussions to be mocked and laughed at.


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## fraser (May 15, 2010)

I think that Carney did a very good job. And he is recognized internationally by his peers for doing so. 

Would you have preferred Canada's lending rate to remain high and thus stifle what business investment was left in an economic downturn? 

Would you have been happy with a huge increase in the value of the Canadian dollar vis a vis our world competitors that would negatively impacted Canadian exports and Canadian jobs?

Low interest rates actually provided those with high amounts of consumer debt -at rates as much as 29 percent, the potential opportunity to consolidate at a much lower rate and move forward with a plan to pay it down with considerably more money being applied to the loan balance vs. the interest component. 

People with basic smarts took advantage of it. Those who lacked that discipline took advantage of it...and then ran up their credit card limits to the previous highs thus compounding their problem. That is not the fault of Bank of Canada policy nor is it the fault of the banks who offered HELOCs and consolidation loans. The fault lies squarely on the shoulders of those individuals who could not/cannot control their spending.

It all starts with the person who buys something that he/she cannot afford. How can that be blamed on anyone except the person who made the purchase?


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## james4beach (Nov 15, 2012)

sags said:


> When TARP was first announced, and other government stimulus programs were announced...........there was a lot of discussion on the negative long term affects of such measures.
> 
> We don't hear much about that anymore. The business media is fully on board for more stimulus........stimulus forever, and nobody seems to think it matters anymore.


It's because the financial industry is addicted to the stimulus drug now. They've _got_ to support it - stimulus is probably the only thing keeping markets alive.


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## alingva (Aug 17, 2013)

james4beach said:


> Are you getting a sense now why I'm so bearish on the economy and the banks (who lend money to everyone)? People are not well off. They are highly in debt, insufficient savings, no retirement money, and barely making ends meet even while they're still employed. Everyone, including banks, have simply leveraged up and this creates the illusion of great wealth in society (big homes, big cars) even though it's supported by very little.


+5

People borrowed a lot of money and it created sense of prosperity but it all created by DEBT, which is not productive.
People have to reduce amount of debt and increase savings which will create huge downturn


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## alingva (Aug 17, 2013)

fraser said:


> I think that Carney did a very good job.


*OMG*, I do not know what else to say
Please watch 'money as debt' or read The Creature from Jekyll Island. Bankers by definition cannot do good job for you, their job is to put you and I in debt, create debt slaves, more we borrow - better they do their job. Better they do THEIR job worse you are off!



fraser said:


> Would you have preferred Canada's lending rate to remain high and thus stifle what business investment was left in an economic downturn?


You cannot create anything if you do not have savings! If you reduce interest to 1% people do not save and there is no good economy which has only borrowers of money. People must save money and we will be much better off if interest is 6% and not 1%.
Switch to alternative media and do not listen to bankers.


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## Longwinston (Oct 20, 2013)

fraser said:


> I think that Carney did a very good job. And he is recognized internationally by his peers for doing so.
> 
> Would you have preferred Canada's lending rate to remain high and thus stifle what business investment was left in an economic downturn?
> 
> ...


agree with you Fraser. Carney had no choice, when the US fed went low interest rate we had to as well. I think the stimulus is long in the tooth in the US but the BOC had little policy room with which to navigate. Ironically, they were in a tough position largely because of Canada's much better performance in the Great Recession.
I especially agree with you on personal responsibility. It seems like people need to blame their poor decisions on someone else. Left of centre parties tell them it's corporate Canada and right of centre blames government largesse. 
Neither has the chutzpah to tell them to look in the mirror.


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## fraser (May 15, 2010)

Blaming the stores and banks for consumer debt levels is to me, something akin to blaming alcoholism on liquer stores and licensed restaurants/bars.


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## pwm (Jan 19, 2012)

I have to laugh when the "experts" say that alcoholism/drug addiction is a disease and has nothing to do with lack of moral fiber, self control, or personal choices. You touch an infected doorknob, rub your eyes, and bingo! You're an alkey!

Same thing with bankruptcy. The bank that lent me the money is responsible for my problems.


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## Daniel A. (Mar 20, 2011)

pwm said:


> I have to laugh when the "experts" say that alcoholism/drug addiction is a disease and has nothing to do with lack of moral fiber, self control, or personal choices. You touch an infected doorknob, rub your eyes, and bingo! You're an alkey!
> 
> Same thing with bankruptcy. The bank that lent me the money is responsible for my problems.


I think you really need to rethink your post.
We could take that a long way and say those that are poor chose to be.
Thought you had a better understanding of people.

Because I've done well and retired early and well off should I make assumptions about other people and what they deal with.
Moral Fiber are you kidding.


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## alingva (Aug 17, 2013)

People are in debt not because they choose to be but because they are pushed there. Bankers control the system and if you are not 1% - you will be in debt. Income grows much much less than inflation and eventually what you earn is not enough. 40 years ago working husband could feed 4 mouths, now husband and wife cannot feed themselves. Why is that???? It has nothing to do with your choice. Again, watch the movie or/and read the book I proposed above. You judge based on what you THINK should be and not based on what HAPPENDS in reality


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## pwm (Jan 19, 2012)

If a person gets into trouble piling on debt to buy crap they don't need because everyone else is doing it then that is their own fault. They can't blame Mark Carney for low interest rates or their local loans officer for too easy credit. They made the choice to take on the debt. No one made them do it. 

It's no different than saying the pusher made me a junkie.


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## fraser (May 15, 2010)

If you think banks or stores are responsible for consumer debt then take a visit to Future shop, Brick, or a local car dealer. The latter is selling cars on monthly payment, not price. It is the best way for the rep to increase his commission by selling a more expensive model at a higher price to someone who only cares what the bi weekly or monthly payment is...or whether it is 48 or 60 months.

Same for Future Shop......do you really think that people need all of that new electronic stuff that is pouring out the door. Or that furniture that is worn out or broken well before it is even paid for?

The person who signs the credit card slip, the car loan, or the reno contract is the only person responsible for the debt. The bank may entice someone to borrow more money, the store may entice someone to buy new furniture on a buy now pay later scheme. 

People make their own decisions and need to be responsible for them. Blaming others is a major cop out. That kind of attitude has become a real problem today....too many people do not face up to, and deal with their problems. They find it easier to blame some boogey man and then carry on doing what they did before that got them into so much difficulty.


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## Nemo2 (Mar 1, 2012)

fraser said:


> People make their own decisions and need to be responsible for them. Blaming others is a major cop out. That kind of attitude has become a real problem today....too many people do not face up to, and deal with their problems. They find it easier to blame some boogey man and then carry on doing what they did before that got them into so much difficulty.


+1


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## Longwinston (Oct 20, 2013)

alingva said:


> People are in debt not because they choose to be but because they are pushed there. Bankers control the system and if you are not 1% - you will be in debt. Income grows much much less than inflation and eventually what you earn is not enough. 40 years ago working husband could feed 4 mouths, now husband and wife cannot feed themselves. Why is that???? It has nothing to do with your choice. Again, watch the movie or/and read the book I proposed above. You judge based on what you THINK should be and not based on what HAPPENDS in reality


That is a patently ridiculous claim by any measure. 
What a low opinion you must have of your fellow citizen.


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## DayTek (Sep 26, 2013)

fraser said:


> The person who signs the credit card slip, the car loan, or the reno contract is the only person responsible for the debt. The bank may entice someone to borrow more money, the store may entice someone to buy new furniture on a buy now pay later scheme.
> 
> People make their own decisions and need to be responsible for them. Blaming others is a major cop out. That kind of attitude has become a real problem today....too many people do not face up to, and deal with their problems. They find it easier to blame some boogey man and then carry on doing what they did before that got them into so much difficulty.


+2

I've been in banking 8 years. Seen thousands upon thousands of profiles. Even with proper financial advice, people choose to be a slave to their debt because the line is being blurred between the needs and every-growing wants of society. People know saving for something is interest-free but, unfortunately, impatience stifles logic.


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## Jon_Snow (May 20, 2009)

My wife and I just decided to spend less than we bring in. It just seemed like a sensible way to live.

Sure looks like a lot of Canadians are not prepared to do this. :eek2:


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## sags (May 15, 2010)

People have to take responsibility for their own finances, but to say predatory lending isn't real is contrary to the obvious.

Payday loans at loan shark interest rates, car loans at 30% plus administration fees, GPS trackers, and sketchy "warranties" ?

Credit card rates of 19% or higher?

My parents didn't have credit cards or credit lines when we were growing up.........so every store had "layaway" plans. It was all done in cash payments over a period of time, with no interest.

Where are those plans today?

Don't kid yourself.

A family member is a super store manager for a big corporate chain.........and the number 1 priority is signing up people for their credit card at the cash register.

People have to accept responsibility.....but so do the lenders.

How about people mired in debt do exactly what big business does, and make a strictly business decision?

Default on their debt, declare bankruptcy, suffer the consequences and then start over with a clean slate.

Donald Trump gives speeches and advice on how to get rich............how many times has he declared bankruptcy again?


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## andrewf (Mar 1, 2010)

While I agree that at the end of the day, the borrower is responsible for their debts, there is no denying that consumers face increasingly manipulative selling tactics and financing products that make it difficult to resist the urge to increase borrowing. I don't expect lenders to altruistically rein in this manipulation, so this is where government has a role to play in regulating how products are sold and financed to consumers. Paternalism isn't my first instinct, but I realize that people are worse than they realize at rational decision-making, and those selling goods and services often exploit every cognitive bias we have to get us to accept worse deals.


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## nathan79 (Feb 21, 2011)

It seems like we can't change people, since giving financial advice usually doesn't work. Maybe it's the way they were raised that turned them into bad money managers, maybe not... It almost seems like some people's brains are just not wired for money management. How do we convince people to make the right choices? 

Why are some people good with money? I think I'm pretty good with money but I didn't just wake up and decide to make the right choices, there had to be something that planted the seed.


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## sags (May 15, 2010)

There is no business better in the world that understand human psychology, than casinos.

They know what colours and fabric make the gambler feel more comfortable. They know that piping in the sounds of an occasional jackpot over the sound system gives the illusion of "winners". They know the slot machines that offer "free rolls" are more enticing that other ones. They know not to put up clocks in the casino, and to make it difficult to "cash out" and easy to "get some more cash" out of an ATM located handily nearby. 

The lending business has adopted some of those proven tactics.......with a free loan of $200 for first time borrowers at the friendly corner payday loan store.

They adopted the "nobody is refused credit" to draw people into the car lot.

They also know that by putting a big pile of paperwork in front of people, and saying........you, can take the next 2 hours reading this......or just sign here, that most people will just sign the paperwork.

People don't have to get sucked into debt..........but it is all so tempting to buy what you want or need now..........with easy, monthly payments.

And it should be pointed out...........the government wants people to spend. They want people to borrow for homes and cars.

The whole policy of cheap money is predicated on people borrowing.

To wag their finger at the rising debt loads of people..............wow..........what a shocker.


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## alingva (Aug 17, 2013)

Many Canadians regret financial choices http://www.advisor.ca/news/industry...ing&utm_medium=email&utm_campaign=PM_Bulletin


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## alingva (Aug 17, 2013)

Do you know what mass psychology is? When you read/watch and hear that you have to own real estate and you are an idiot if you rent - you change your mind about renting. When you buy your property - all the problems start. Your banker/real estate agent and the lawyer tell you only so much, they do not disclose the cost of owning the property. Most of the people who have homes (especially in big cities) are totally in debt because they own their property. They have not chosen to be in debt, they were told they can afford it. They were not told they cannot afford anything else. People do not have financial education, if you go to a country where banks do not lend money (Mongolia, for example) - people have huge savings. 30y ago Canadians saved 20% of their income, what happend since then? Did they decide to waste their retirement savings? Yes because banks told them they can affor to waste it and save later. Remember, YOU ARE RICHER THAN YOU THINK..I cannot find out how, probably by borrowing from Scotia..Yes, you have idiots how would spend no matter what but majority of Canadians who are in debt do not want to be in debt!


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## alingva (Aug 17, 2013)

here it is
http://www.theglobeandmail.com/glob...miserable-canadian-homeowner/article15495215/


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## Rusty O'Toole (Feb 1, 2012)

Next big shock horror expose: Weddings are fun but they don't warn you about being married.


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## Rusty O'Toole (Feb 1, 2012)

If banks in Mongolia don't loan money what the hell do they do with it?


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## alingva (Aug 17, 2013)

Rusty O'Toole said:


> If banks in Mongolia don't loan money what the hell do they do with it?


A small secret, money that you borrow from your bank IS NOT the money that someone deposited and IT IS NOT BANK'S money. If I give you something I have to own it. If I lend you money I have to own it. If a bank gives you money - it DOES NOT own it, it just puts 000 and 111 in your accounts. Money did not exist before you borrowed it. Banks have to have about 10% in reserves, all the rest they do not have! A bank in Mongolia (I assume, I do not know for sure) lends only what it has that's why as house in Mongolia cost 20 times less than here. Do they use the same cement?


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## SpIcEz (Jan 8, 2013)

alingva said:


> A small secret, money that you borrow from your bank IS NOT the money that someone deposited and IT IS NOT BANK'S money. If I give you something I have to own it. If I lend you money I have to own it. If a bank gives you money - it DOES NOT own it, it just puts 000 and 111 in your accounts. Money did not exist before you borrowed it. Banks have to have about 10% in reserves, all the rest they do not have! A bank in Mongolia (I assume, I do not know for sure) lends only what it has that's why as house in Mongolia cost 20 times less than here. Do they use the same cement?


Also about fractional reserve banking as you described above. The initial intent was that if the bank has 1 milion in the vault, it could lend out 900 000$ and had to have 100 000$ in its coffers as reserve.

This turned into, keep the 1 million dollars in the vault and lend out 9 million dollars of fictional non existant money with interest.
The interest on 9 million is much more than the interest on 900 000$. BIG PROFITS.

Which is why, in part, we are locked into the inflationary cycle. There is NOT enough money in circulation to pay off principal and all the interest owed. If there is no inflation, the whole thing collapses.
Obviously I have over simplified things and there is more to the economy than just this. But most people don't know about fractional reserve banking.


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