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Carney’s debt warning rings hollow

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Seriously, can the Bank of Canada really blame anyone but themselves? This week the Governor of the Bank of Canada, Mark Carney, carped at Canadians about how indebted they are, which is not completely out of line. Then again, with the kind of interest rates he is facilitating, who can resist spending?

Mr. Carney's remarks about debt came as part of the Bank's semi-annual assessment of the financial system. The Canadian financial system is still pretty sound, was the verdict, but the world is in trouble. The European crisis could take a long time to be resolved, and in the meantime a credit crunch (Mr. Carney used other words to say that, but it is what he meant) is developing.

A credit crunch in Europe could mean a credit crunch in the U.S. and a credit crunch in the U.S. could mean a slowing (or a recession, but you didn't hear that from me) in the U.S., and a slowing in the U.S. could mean a slowing for Canada.

It is a couple of steps from here, but the Bank was basically warning Canadians not to get complacent and to get their debt situation under control.

Ah the debt thing. Yes, Canadians have been piling it up. According to Statistics Canada, as of the second quarter of this year, Canada had a debt to personal disposable income ratio of over 150 percent. That is a macro number - for the whole economy, not for the average Canadian household - but the point is that it is high and on the rise.

Then again, let's think about why it has risen. What encourages people to 'buy' anything? Well, partly it is low prices and indeed that is what Canadians have gotten from the Bank of Canada. Canadian interest rates are pretty much at bargain basement prices, and they have been for years now. Of course it seems like a good idea to borrow to renovate the kitchen or whatever.

Mr. Carney is right when he says that Canadians with debt are vulnerable to the shocks that could come with an economic slowdown. If you lose your job while you are still paying back the cost of that reno, it is going to be small comfort that interest rates are not higher. At this point, however, it seems that employed Canadians are not unduly worried about unemployment, or about their level of debt.

But Mr. Carney is worried - which makes you wonder why he doesn't do something about it. After all, he is the guy who controls interest rates - more or less. If the Bank of Canada raised rates, Canadians would certainly pare back their debt levels at bit, right? But the Bank of Canada is not raising rates at all, and this week announced that their benchmark rate would stay at 1 percent.

Thing is, right now Mr. Carney cannot raise interest rates, whatever the domestic situation. Canada operates as part of the global economy, and right now the global economy is on shaky ground. It is no time for a small, export-driven economy to be tightening monetary policy.

So what can Mr. Carney do? He can talk about the situation, and point out its grave dangers. He's talked about debt before, and no doubt he'll be talking about it a lot more through 2012.

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