Canada’s consumers’ incomes not keeping up with debt levels, study finds

http://www.vancouversun.com/business/Canada+consumers+incomes+keeping+with+debt+levels+study+finds/2754124/story.html

Summary:

Canadians are spending more freely due to cheap credit. Their incomes cannot support their magnitude of spending. The appreciating rate of assets being purchased is not at par with the liabilities. Therefore people cannot pay off the amount of debt owed. The consumer capability index measures a consumer’s ability to spend. It is based on: debt-to-income, debt-to-asset ratios, real income growth, long-term unemployment rate, house price to income ratio, personal savings rate, and personal bankruptcy rate. A mortgage is 147 percent of a person’s income. Although they receive an income growth with low interest rates, nevertheless, people are still spending. The low interest rate stimulates and encourages people to borrow money and spend it to help our economy. With increased interest rates, people would rather pay off their debts and start saving.

Connection:

People are spending more money due to low increased incomes and low interest rates. Low interest rates encourage people to easily spend money. Thus, people are putting more money into our economy and this inflation will occur. As the demand increases because of consumer spending, the total demand for goods and services would ultimately exceed the supply. This results in a demand-pull inflation. This would eventually lead to the increased prices in the Consumer Price Index. With families spending more money, it allows businesses will experience increase in revenue. This leads to businesses having the potential to increase wages. In the circular flow of money, increased wages does not support the amount of debt owed.

Reflection:

In my opinion, the demand-pull inflation is not a good idea. Due to the habits of consumers, the debts will end up compiling up. In the early stages, it wouldn’t be too difficult for consumers because of low interest rates. In the long run, their debts will be their Achilles heel. If this continues and people are unable to pay off their debts, our economy will go into recession. It is significant that the inflation rate is controlled so the economy can stay inert.