May 20, 2015

Fraser Games: Running government like a household

Remember this next time some politician, aspiring or otherwise, says that government should be run the way people, the voters, run their homes and finances.

From Business in Vancouver:

Worries about Canadian household debt “overblown,” says Fraser Institute


Canadian households are not being irresponsible when it comes to taking on new debt, according to a Fraser Institute study released May 20.

According to Statistics Canada, household debt in this country has increased in almost every year since the agency began tracking this information in 1961. This statistic on its own may sound alarming, but when the whole picture is taken into account, the situation isn’t as dire as it may seem.

“Almost every day we hear analysts warning that household debt levels have reached record highs,” said study co-author Philip Cross, former StatsCan chief economic analyst.

“While debt levels are growing, those warnings should be tempered by the fact that asset and net worth levels are increasing at a far greater rate.”

Between 2010 and 2014, household debt grew 21% to $1.8 trillion. At the same time, however, the value of household assets increased to $10 trillion, representing growth of 31% – a full 10 percentage points higher than the increase in debt. …

The Fraser Institute argues that debt increases are now being leveraged into gains in household assets, which in turn improves household incomes and net worth.

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  1. Exactly. A discussion of debt in isolation is meaningless unless one also discusses assets and the value or income these assets produce.

    Borrowing to invest in income producing assets, such as rental properties, REITs or dividend paying stocks or ETFs makes total sense to me. Debt has to be seen in light of assets on the consumer side.

    Borrowing to pay for higher and higher civil servants salaries and benefits such as excessive pension liabilities on the other hand is not good use of debt:

    Pension liabilities for the underfunded non-paid DB pensions should be ZERO, i.e. pensions need to be a separate fund funded by the employers and the employee every month with ZERO liabilities. In the current low interest rate environment it is especially obvious that those pension entitlements are grossly excessive and grossly underfunded, i.e. the salaries + benefits far too high!

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