by John Voorhorst

Today, as I sit down to write about the economy in general and household debt in particular, the top headline in the news is the largest swing in political power I n America in more than 70 years. Some are hoping now, with the Republicans in charge of the House, that the United States will curtail their deficit spending. But if history is any guide, it is far from certain that the Republicans will be able to, or will even make a strong effort to, reduce this spending.

Also in the news is the report that Mr. Bernanke, the chairman of the United States Federal Reserve, has announced the next stage of what is now being called QE2 or “quantitative easing two.” What is quantitative easing you ask?  Well, very simply, the government buys back its own debt with dollars it creates out of nothing. And when they do that, two things happen: the government increases the amount of cash in circulation and by increasing the amount of cash they reduce the value of that cash.

So how will the Republican victory, and this quantitative easing, impact the US economy? And how, in turn, will that impact the Canadian economy? All anyone can offer are guesses. We live in economically uncertain times, and that can be quite unnerving. Or perhaps none of this means anything to you, and you’re already yawning, as you consider moving on with your life.  In some sense, that's all well and good because we know that ultimately God determines what will happen in the world around us and He is also in control of our powerful neighbor to the south so we don’t need to be afraid.

But in His word, God does call on us to be discerning, and to be good stewards with what He has given us. It is prudent to think then of how best to respond to today’s economic and employment uncertainty. That is why this month I would specifically like to address the area of personal debt.

Debt growing

You may recall that last year (“Downsize your Debt!” June 2009) I wrote an article about debt in general and our personal debt in particular.  Since that article many things have happened. Interest rates have remained at historically low levels.  Because interest rates have been very low, a lot of people have felt comfortable in adding to their personal debt.  I recently had the opportunity to listen to a presentation by a representative of one of the big six banks.  He said the population of Canada was about 33 million and that currently in Canada there were a total of 72 million credit cards issued. The total credit card debt, according to him, was $72 billion. That works out to an average of 8.7 credit cards per household and credit card debt of $8,700 per household.

Further to that, in the 2009 calendar year the number of delinquent credit cards had increased by 50 per cent, “delinquent” being defined as being more than 30 days late in making the minimum payment.   And yes, most Canadians are apparently only making the minimum payment on that debt.

In addition to credit card debt, there’s also lines of credit, car loans, finance company debt and of course mortgage debt. An article in the October 20th issue of the Financial Post pointed out that to the end of August, consumer credit had increased by 3.7 per cent in the last three months.  If that rate continues we would see an annual increase in debt of 14.8 per cent

We haven’t learned our lesson

So what is the point of all this you may ask?  Well, the financial crisis of 2007 and 2008 was apparently caused by too much debt in the United States.  Supposedly Canada was spared from the worst effects of this crisis.  But what, if anything, have we learned?

Finance Minister Jim Flaherty just reported that the federal deficit was some $2 billion more than was predicted in the spring of 2009. He will report a total deficit of some $55.6 billion. And Canadian's personal debt levels are also increasing.  This will become a drag on the economy.  This rate of growth in overall debt simply is not sustainable.

But what about you?  How is your household doing?  Is it fair to assume that church members are not that much different than the rest of society?  I for one sincerely hope that we have done all that we can to keep our debt levels in check.

Minimize your debt!

If you, like many Canadians, are having trouble managing your debt let me do my best to offer a few suggestions.

First, if you do have more than one credit card, do your best to pay down the one with the highest interest rate. Some store cards are charging 19 or even 23 per cent interest.  Pay those down first.  Never miss a minimum payment. Not even by one day. If you miss the due date by one day it is reported as one month late by the credit card company to credit rating agencies and 2 late payments will have an immediate negative impact on your credit rating. This also has a compounding effect, because as your credit score goes down, the interest rate on your credit cards goes up.  Even if you have a credit card with a lower interest rate but you miss two payments, it is very likely that the institution that issued the card will increase the interest rate. Conversely, if you are carrying a balance on your credit card and you have not been late even one day in the past year, call the company and ask them for a cut in the interest rate on your card.  If your credit record is clean you should be able to convince the credit card issuer to reduce your rate down to 11.9 percent from 19 or 23 per cent, which is fast becoming the standard rate for Visa and MasterCard.

To be clear, I am not at all advocating that you carry a balance on your credit card. But if you do carry one, ask the issuer to reduce the rate.  Applying for a secured line of credit and paying off all your credit card balances might reduce your costs even further. 
Always remember, though, that consumer debt is not a positive item on a personal balance sheet.  Borrowing money to purchase an asset that increases in value, like a home, makes good financial sense.  But borrowing money to purchase a depreciating asset, like a television or an entertainment system, makes little or no sense.  We need to return to what our grandparent taught us; buy only what we can afford to pay for with cash.

We can read some good advice about debt in Proverbs 22:26 and 27: “Do not be one who shakes hands in pledge or puts up security for debts; if you lack the means to pay, your very bed will be snatched from under you.”

Rewarding borrowers at the expense of savers

So, let’s find some conclusions. Mr. Obama lost more seats in the American Congress then any president in 70 years. Why? Perhaps because the American people realize that borrowing more and more money so that the taxpayer becomes responsible for all of the poor business decisions of banks and other financial institutions is not the correct solution. Chairman Bernanke has announced an additional $600 billion reduction in the value of the American dollar. He will add $600 billion into circulation to buy back debt from other parties.

His intent is to stimulate the economy with this influx of cash, and the initial response of the stock market to this additional $600 billion bailout attempt has been positive.  Markets were up 1.5 per cent the day he made the announcement.  But think about this for a moment. Chairman Bernanke is doing his best to devalue the American dollar. If he succeeds at this he will successfully reward all those banks, corporations and individuals who took on too much debt. If the dollar is devalued, the debt they owe is also devalued. And Chairman Bernanke will also be punishing those who have managed to save some money.  As the dollar is devalued their savings will have less purchasing power as time goes on.

However, you should know that I don’t believe that Mr. Bernanke will succeed in his efforts. Previous attempts at devaluing a country’s currency when deflation sets in have not met with success. Just look at Japan. They also tried to re-inflate their moribund economy by reducing interest rates, (down to zero per cent) and they also turned up the printing presses. All to no avail. The Japanese find themselves in the unenviable position of having their stock market still down some 75 per cent from its December 1989 peak. And fifteen years ago it took about 85 yen to buy a US Dollar and today they buy a US dollar for 90 Yen.

The reality is this; the issue is not a lack of cash in the system. For us in North America the problem is that people in general have been living beyond their means and so even if the government makes two trillion dollars available, no can access it.   The unemployed cannot borrow more money because their income is down and they cannot pay what they owe already. Those who have a job cannot borrow more money because they do not have any equity left in their home.  Their house is already worth less than the mortgage on it. Businesses cannot borrow more money because their sales are down so their profits are already slim to none.  So, once again, the issue is not a lack of liquidity.

Neither Mr. Obama nor his Federal Reserve Chairman, Mr. Bernanke, has as much power over the financial markets as they would like to think.

So, once again, at risk of being repetitive, pay down your debt, and please do not for one moment believe that these gentlemen will succeed at re-inflating our economy. Deflation is the biggest risk facing our economy and I have outlined above why I believe that to be the case. The stock market will not and cannot continue its upward movement. Actually, by the time you read this it could well be that the market will be on its way down to levels well below that reached in the spring of 2009.  Unless you are a sophisticated investor you should be holding T-Bill or Money Market Funds in your mutual fund accounts, and if you are using any type of bank savings accounts, high daily interest accounts are the best place to be.

The bottom line?  Prudence, both in borrowing and investing.  It’s the only way to go.