As Canadians head into 2016, and government debt levels soar higher, we might do well to remember lessons learned long ago.
Anecdotes abound of cash strapped consumers forced to borrow off a Visa or Mastercard to meet living expenses. Credit is convenient and its ease of use is intoxicating. But, like most intoxicants, it’s the day after, or in this case when the bill comes due, that the headaches start. Interest on debt can be horrific. Most credit card bills indicate to the card holder how long it takes to pay off the debt should a person choose to make minimum payments only. Quick fixes have a price.
The prevalence of low interest loans and easy-to-get credit cards has not been good for the country. Most youth today know nothing of interest costs or the qualification process their parents and grandparents went through years ago. Vehicle loans as an example have very low interest rates, if not zero rates. Most of us know the cost to borrow is factored into the price when zero interest rates are used. The attractiveness of these loans and mortgage rates that are in the single digits has given people a false sense of security. Many have enjoyed exceptional rates for some time, but that time will end eventually.
Government itself is not much different when it comes to borrowing. Low interest rates have covered up a multitude of sins and ineptitude provincially. A few years ago at a retreat where Jim Wilson, interim Ontario PC leader, addressed our group, he offered up a sage warning about provincial debt. Through low interest rates the government was able to conceal the extent of debt Ontario is carrying by making cheaper payments. There will be a time that those payments will creep up and become more burdensome.
Even with historically low rates, it was reported in the National Post that the province’s current interest payments alone have surpassed the budget for the Ministry of Community and Social Services. Interest costs are now higher than programs designed to address the neediest in society.
The new Trudeau Liberal government in Ottawa has made no bones about its plan to take on more debt and run deficit budgets. Money will be borrowed and added on to the country’s outstanding obligations. According to the same National Post report, more money will be spent federally paying interest than the government currently spends on national defence.
The short-term benefits of low interest rates for borrowers have had a major impact on investment income for seniors. A little trick we learned years ago was something called the Rule of 72. When an interest rate is divided into 72, it quickly shows the amount of time it takes for money to double. At 8%, a sum of money left to grow doubles in 9 years. Using a rate of 3% requires 24 years to double. For many seniors facing increased costs to run their homes, the inability to garner a reasonable return plays havoc with their long-term financial wellbeing. With no sign of letting up, costs to run a home are becoming more challenging for those not gainfully employed or those reliant on investments not generating enough return.
Our interest in the subject causes us to wonder what would happen if Canadians were forced to buckle down and deal with debt issues. If challenged to accept fewer programs and less largesse, would Canadians take on the task with the sincerity citizens showed in war-time as they honoured rations and did with less? It’s a riddle that perhaps has no answer and hopefully never unfolds with the severity found in the Great Depression.
For now it seems most people are quite content riding the current wave with little regard for the long-term consequences. But we should not forget past lessons.
