Tuesday, December 13, 2011

Canadians Are Spending Beyond Their Means As Investors Buy "Safer" Canadian Bonds

Bank of Canada Governor Mark Carney said Monday that Canada's is in a better position for the coming years as other advanced nations struggle to reduce greater debt load. However, he added Canada must refocus the economy away from "unsustainable household spending" and toward greater business investment,

Carney said that the United States and Europe face several years of daunting fiscal and structural adjustments that will crimp global economic growth. Events since the 2008 crisis have also lessened Canada's "margin of manoeuvre."

In Canada household debt has climbed by 13% relative to income, even as foreign investors snap up Canadian bonds as both a vote of confidence in the economy and the government's fiscal management. However, too much of the capital coming in is now used to fund household spending instead of building productive capacity..

"We might appear to prosper for a while by consuming beyond our means,"  "Markets may let us do so for longer than we should. But if we yield to this temptation, eventually, we, too, will face painful adjustments."
Companies must use their solid balance sheets to become more productive over the long haul and work harder to crack new customers in emerging markets.
"This would be good for Canadian companies and good for Canada,"  "A virtuous circle of increased investment and increased productivity would increase the debt-carrying capacity of all, through higher wages, greater profits and higher government revenues. This should be our common focus."

He added that global public debt as a share of global GDP currently around 80 percent are equivalent to levels historically associated with "widespread sovereign defaults" and the adjustment could take longer and be harsher than anyone can see now,

"As a result of deleveraging, the global economy risks entering a prolonged period of deficient demand," "If mishandled, it could lead to debt deflation and disorderly defaults, potentially triggering large transfers of wealth and social unrest."

"Actions by central banks, the International Monetary Fund and the European Financial Stability Facility can only create time for adjustment," "The route to restoring competitiveness is through fiscal and structural reforms. These real adjustments are the responsibility of citizens, firms and governments within the affected countries, not central banks."

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