The amount that Canadians owe compared to their disposable income rose to an all-time record last quarter, although their net worth also increased.Statistics Canada reported Friday that the level of household credit market debt to disposable income increased to 163.7 per cent in the third quarter from 163.1 per cent in the second quarter.That means Canadians owe nearly $1.64 for every $1 in disposable income they earn in a year.Policymakers are fixated on the debt ratio in part because it was at above 160 per cent that households in the United States and Britain ran into trouble about five years ago, contributing to defaults and the financial crisis that triggered the 2008-09 recession.
The easy money policies of the Bank of Canada, in step with other Central Banks of developed countries, continue to encourage citizens to take on more debt and use greater leverage.
As we have stated repeatedly on this site, easy money policies do not have a happy ending.
Canadians have not learned the lesson dished out to their southern neighbors when it comes to restraining their spending and borrowing habits.
The deflationary forces that were at work in 2007, are still at work under the surface, despite the best reflation efforts of Central Banks and the governing parties in Western Democracies.
But the reflation party appears to be coming to an end.
The stock market's rise is slowing substantially and a correction appears imminent.
The bond market is correcting as interest rates continue to rise.
While some analysts suggests bonds will correct and stocks rise, my view is both will correct together as deflationary forces wash bad debt out of the financial system.
Where does that leave the lowly investor?
My guess is hard assets generally should outperform, particularly precious metals and miners.
Since this sector was the poorest performer in the past two years, its bottoming process is nearly complete and should perform well as the leverage again comes out of the system.
This time, Canadian housing prices should also correct significantly. That is when we will finally see the high personal debt levels reverse.