When I wrote earlier this month, I stated the following with regard to personal debt levels in Canada: "There is regular bemoaning of the fact that personal debt as a percentage of personal income is at an alltime high and an increase in rates is inevitable. The costs of carrying the high debt levels will then put many people in financial difficulty.
"The 'inevitable' increase has been prophesied for several years now with absolutely no change in the bank rate. Perhaps the current rates are the new normal. Back in Economics 101, one of the few things that stuck was the old supply and demand curve. If prices dropped, demand increased. This applies to debt as well as material products.
"But it is obvious that the debt to income ratio can be a lot higher without causing a problem. Also the government doesn't want you spending less, as we need consumer spending to boost the economy - especially with the price of oil dropping so precipitously. With rates so low, it wouldn't make sense to pass up a good investment (however you personally define that) just because we have historically high debt to income ratios." If only I had gone that extra step and predicted the cut in the bank rate! Apparently none of the economic wizards who prognosticate on such matters prognosticated correctly.
Bank of Canada Governor Stephen Poloz surprised everyone by dropping the bank rate a quarter point from one per cent to 0.75 per cent, basically saying what I said above: "We need consumer spending to boost the economy - especially with the price of oil dropping so precipitously."
However, as of the time of this writing, none of the chartered banks has dropped their prime rate, although they had dropped the rate they paid on savings. Now I don't begrudge the banks a momentary increase in their margins given that my retirement funds are overloaded with bank stocks. As my gambling days passed by, banks seemed a sound investment with increasing dividends.
Back in my early accounting days in Winnipeg, I worked with a client who was an aged medical practitioner whose specialty I no longer recall. Whatever it was, he made a lot of money at it, all of which - other than living expenses - he invested in Toronto Dominion Bank stock.
By the time I crossed his path he had a very sizable position in the bank through constant purchases and reinvesting his dividends. He convinced me of the merits of investing in banks. So their massive earnings don't grieve me. Just keep them coming.
But if the banks don't pass through the decline in the bank rate eventually, there will be no boost in consumer spending, only a drop in the value of the Canadian dollar against the American dollar as capital flows out on Canada for higher returns elsewhere.
And the only advantage I see to that is the elimination of line-ups at the Point Roberts border crossing, which I guess isn't such a bad, if unintended, outcome.
