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Debt levels are dangerously high and is a risk for us all

Debt levels are dangerously high and is a risk for us all

October 22, 2020

Deferred costs, such as mortgage payments and billions of federal support, have camouflaged our financial weakness and the dangers of staggering amounts of debt, writes Peter Watson. 

Debt is good and debt can be dangerously bad. That is an issue that affects us all.

The magic of debt can be every consumers’ dream. Without any savings suddenly the possibility of a new car, house renovations, or a special vacation become a reality.

Rock-bottom interest rates are just too enticing.

Unfortunately, there is a problem. Debt has to be repaid. Plus, interest payments can add up even during this period of low interest rates.

The lethal combination of too much debt during the COVID-19 pandemic will inflict pain on millions of Canadians.

Recently we have had a brief but misleading reprieve from the dangers of debt. Statistics Canada reported a significant decrease in household debt.

The true picture is that of pending difficult financial times for many.  Household debt declined because many people were allowed to defer mortgage payments, property taxes, and rent.

Add in the billions of dollars provided by the federal government in various subsidies just means we have been in the eye of the storm.

The government cannot keep this level of financial support forever. Plus, various deferred payments will have to be made.

People will reduce or eliminate some of the spending they have historically done. Many businesses will fail.

Consumer spending accounts for approximately 60 per cent of the Canadian economy. When consumer spending declines the economy will suffer.

This will have a chain reaction when businesses cannot afford to pay their suppliers or maintain pre-COVID levels of employment.

We as a country and as individuals have a lot of very tough financial decisions to make.

Added to this complexity for both people and the government is the reality the pandemic is continuing. That costs both directly in healthcare initiatives and indirectly as business activity is curtailed.

Debt will continue to be an important theme in the months and years ahead.

Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com