“With Canadians so deep in debt, it would be extremely difficult for domestic spending to pick up slack in the economy if things started to go downhill. That could result in a serious downward spiral in employment levels, household spending and the quantity and quality of credit outstanding, the report says.
“There’s a legitimate fear that there may be a Wile E. Coyote moment here,” says Hopkins.
“Households are spending money they assumed would be coming, then they realize they’ve run over the cliff because income from exports from these trading partners is not materializing and that’s translating to weaker jobs.”
The situation Canada currently faces is unique, the authors say, because domestic consumption is usually the more steady contributor to economic growth compared to exports and investment. But this time, household debt is out of control.
“Right now it all depends on the household sector and the household sector is overstretched, especially compared to historical trends,” Hopkins says.”
“While some point out that Canadians delinquency and default rates are very low, the Moody’s analysts say this is often the case in a credit boom — the “calm before the storm” — because the availability of cheap credit allows people to keep borrowing and gives more flexibility in paying it back.
The problem is once a crisis hits, which most likely would be caused by external factors, it could be exacerbated because so many Canadians have little wiggle room to borrow and spend. Defaults and delinquencies could rise quickly and leave more households underwater, they say.”
- from ‘Canadians stretched to limit as Moody’s warns of sky-high debt loads’, G&M, 6 Sep 2012
When it turns, virtuous cycle turns vicious.
Not a wish, simply the way it will be.