The North American Consumer: An Endangered Species?

Is the American consumer on the way to extinction? Everyone can imagine the scene some 50,000 years in the future., when a group of renowned paleoanthropologists began digging in a geographic area of ​​the East Coast known as … The Great Wall Street Depression. They are looking for the fossilized remains of a subspecies of Homo sapiens it is believed to have existed at any time between the mid-20th century and the early 21st. After several days of fruitless research, luck arrives: they discover the fossilized skeleton of a hominid with telltale characteristics. The large skull implies that this Homo He was smart, the long femur is proof that he was well fed, and the gold teeth attest that he took care of himself. But what really catches the attention of paleoanthropologists is the fact that this specimen still wears a VISA in his right hand and a Mastercard in his left hand. They have unearthed the first fossilized remains of the American consumer!

Now that the Federal Reserve is openly on the road to war with higher interest rates and the Bank of Canada is ready to follow suit, an important economic issue is the assessment of the enormous existing consumer debt. How much weight does consumer debt have in the economy as a whole and is the North American economy threatened by it? There is a fear these days that if central banks continue to raise interest rates, indebted consumers will become nervous and the overall result will be a sharp slowdown in the economies of the United States and Canada. Those who believe this expect interest rates to remain at historically low levels for a long time. At the heart of this problem is the high and growing indebtedness of consumers. In Canada, the debt-to-personal income ratio now exceeds 100 percent and in the United States it is more than 90 percent. By any standard of comparison, this is a lot of money. For example, on the other end of the spectrum in the European Union, the average debt-to-income ratio is 65 percent, while New Zealand, Australia, and Japan fall somewhere in the middle on an increasing scale (figures for Hong Kong , now under Chinese jurisdiction, are not available). It used to be that Americans were the biggest spenders, but now Canadians have surpassed them. And furthermore, with debt growing at a rate of nine to ten percent in Canada and seven to eight percent in the United States and income growing at a rate of only two and three percent respectively, these debt ratios -income are bound to increase even further. The question, then, of course is: how much is too much?

Economists have always been wary of consumer borrowing for the past fifty years, yet disaster has eluded us so far. Canada’s debt-to-personal income ratio was 98 percent in 2000, which is not much different from today. And although interest rates rose in 2000, the economy remained strong. In fact, the main reason consumer debt has risen steadily over the past fifty years is simply because credit has become more and more available. Lenders in Canada, and to some extent in the United States, have not only lowered their rating standards, but have also been offering a variety of credit products, making it even easier for consumers to meet minimum monthly payments without substantially decrease your debts. . Lenders have even made refinancing easy, and in Canada there have been reports of minors going (and buying) with credit cards with limits in the tens of thousands. Consumers today have more financial flexibility than ever and, for better or for worse, they are making the most of it. And this flexibility allows them to choose to carry debt when they may not have had this option in the past. Furthermore, it is certainly true that low interest rates have fostered higher indebtedness, which, in turn, has stimulated higher spending. The properties are proof of this. All the BMW, Mercedes, SUV that we see on the streets are another proof.

But has all this additional borrowing really increased the vulnerability of consumers to higher interest rates, as suggested? Consider the extraordinary car deals offered by the big three: GM, Ford and Chrysler are offering promotions on select models with zero percent financing for up to 60 months. As interest rates rise, those buyers will be unscathed for the next four to five years. The same goes for mortgages, where many home buyers have already secured themselves for the next several years. Ultimately, this means that returning interest rates to more normal levels will not, if at all, have a serious impact on these consumers with existing debt. And barring tragic events like another 9/11 or another war, consumer spending doesn’t appear to be slowing down in the face of a gradual rise in interest rates. To the good fortune of all of us American consumers, they don’t seem to be on the way to extinction at any point shortly after all.

Luigi frascati