Rocket Scientists’ Guide to Money and the Economy

Rocket Scientists’ Guide to Money and the Economy

Rocket Scientists’ Guide to Money and the Economy is considered an influential book written by Mike Soteric. Understanding the context of the book makes one to understand why rich people continue to be rich, and the poor to be poorer. According to Mike, higher proportion of the global wealth is held by a small percentage, increasing the gap between the poor and the rich. He focuses on multiple issues including economy, debt, family issues, politics, food banks, debt jubilee, poverty and nutrition, among others. In his book on money and economy, he considers debt as significant element that subject humans to poverty and poor standard of living. Most families use borrowed money which is attributed to high interest changes, and upon paying, they are left with nothing but more debt. Mike suggests that the best approach to eliminate the existing debt crisis around the globe is establishing a debt jubilee whereby all debts will be repudiated and dismissed. This research will focus on the Canadian debt crisis, highlighting its nature, current trends and recommendations to ease the burden.

History and background of Canadian debt

Generally, the steady rise in Canadian household debt is considered a substantial reflection of generational shift of attitude. In 1930s, people were raised in the depression, and after WWII, people were instructed that saving was virtuous but borrowing was nearly a sin. Since then, generations have effectively managed to rationally utilize debts to make their lives better. People could use the loan to purchase a house, pay university education, and establish a business. The use of acquired debt to create wealth is considered why the net worth of house hold continues to grow despite having numerous debt liabilities. People have increasingly secured more loans to increase their personal net worth. For instance, in 2013 Canadian report, household had over $10 trillion of acquired assets in form of real estates and equity. This was dramatically high compared to $1.8 trillion debt liability composed of credit card debts and mortgages. The advancement in information technology have aided most credit company to assess the risk associated with lending, making most loans more accessible today than in the past.

The nature of Canadian debt

In recent decades, Canadians have been flooded with new concerns about household and government debts. Canadian household takes more debts to finance house furniture, kitchen fittings and real estate, as well. This makes their net worth to grow immensely, but to unprecedented levels. In most cases, household indebtedness concerns focuses on variables such as the ratio of household debt to income, or total household debt accumulated. According to statistical analysis, two third of the debt is linked to mortgages and the remaining portion is split between credit and other loans. In 2016, the house hold debt in Canada was considered to reach over $2 trillion a hike from $345 billion in 1990s. In the same period, the government debt has also escalated from $760 billion to $2.5 trillion. However, this data may fail to recognize that the growth in household debts could be as a result of interest growth falling. In the last few two decades, the cost of borrowing has fallen, encouraging people to borrow more.

Although the rate of borrowing has increased, people fail to consider the asset side of the balance sheet, which has risen dramatically. Canadian households are borrowing to invest in substantial appreciating assets including businesses, real estates, pension schemes and other financial investment. In Canada, the household assets have risen from $2.2 trillion in 90s, to over $12.5 trillion in 2016. Although Canadians were linked to positive net worth, political officials still show their concern over household debt. Therefore, debt is a concern that is not manageable based on the economic circumstances the household are subjected to. Management of house hold debt is affected by economic shocks that lead to problematic debt servicing, high cost of debt servicing and increased interest rates. The increase in debt servicing cost considered to immensely squeeze Canadian’s pocket and solutions remain controversial.

Current trends on Canadian debt

In contemporary society, people with unsecured loans are subjected to high repayment costs, with less or no money in their household budget to avail the payments. With the increasing number of percentage of individuals with debts in Canada, the burden is becoming unmanageable. According to 2018 statistical reports, “the average insolvent debtor had just $273 available after paying living expenses to put towards debt repayment on an average unsecured debt balance of $49,289.” This implies the income is dropping and debts are hiking primarily for vulnerable household. Since the higher debt repayment demands and the cost of living are outstripping wage growth, the trend of debt concern will continue to unforeseeable future.

Today, Canadians are spending much of their income of debt payment than ever before, limiting their disposable income. Debt service ratio has also risen to 14.9%, implying the debt burden will remain a substantial vulnerability for Canadians and the entire economy, as well. Data from public opinion reveals that most Canadians have been subjected to debt anxiety and paying them is an off-priority for most consumers. In September 2009, more than 11,935 consumers were reported to file for insolvency to the office of Superintendent of Bankruptcy, a 19% increase from the previous decade. Lately in September 2019, more than 102, 024 cases of insolvencies have been filed, implying severity of Canadian debt issue. Most incidences of insolvency are coming from low-level Canadians, suggesting development of cracks in Canada’s household setting.

With increased rates of unemployment, a significant pressure will be imposed on country’s financial system. The recent survey concerning the Canadian debt issue is that two out of five indebted individuals are more likely to escape repayment in their lifetime. According to Manulife Bank of Canada report, the spending-to-income ratio is operating negatively, since 45% of Canadians reveals their consumption rate is increasing more than their income. In the bank survey, 94% of respondents agreed that most households are indebted but unwilling to repay. Besides, another online survey conducted to assess the concern of country‘s high rate of indebtedness because the total debt per consumer was $71,978 in 2019’s second quarter, a hike compared from $57,003 five years before. This implies the issue is still escalating and efforts to mitigate the concern have not yielded viable solution.

Based on the OECD report, Canada’s household debts is considerably higher than in other countries, creating a warning sign to the national economy. The prices of houses are increasingly escalating, meaning Canadians need to borrow more to become house owners. However, borrowing does not end after acquiring the mortgage, other expense including furniture, heat and maintenance will require more debt. In a nutshell, most Canadians depend on debts to keep their households running. While the recent survey reported that Canadian households are holding over 2.3 trillion as debts, bank of Canada has identify the situation as a significant risk to the economy. The country need to establish better approaches to ensure bank regulate their interest rates and, moderate the prices of houses to increase Canadians disposable income.

Possible solutions

The Canadian debt concern is becoming a significant crisis, and different approach should be taken to address the situation. The following are substantial solutions that can help in suppressing consumer debt levels. Firstly, the central bank (bank of Canada) should begin to reduce the interest rates to discourage Canadians from heaping more debts. According to principles of economics, people will borrow less when the cost of borrowing is high. However, the reality is considered complicated because overstretched Canadian will borrow and struggle with high repayment in the long-run. The central bank need to establish a clear guideline concerning the interest rate, without allowing financial institutions to alter the rates. In Canada, people have experienced great loss for borrowing loans attributed to variable interest rate.

An increase in interest rate would subject most consumers to substantial risks including strained consumer spending, and other financial related problems. The bank governor reported that lowering interest rate while still the economy is running smoothly is possible, but a healthy economy should be established. This economy should offer Canadians better means to pay their debts then rise up gradually in the end. Secondly, financial literacy is a significant tool to enhance Canadians’ financial strength. Whether it is fighting fraud or eliminating the debt crisis, the population should be taught on how to establish sound and viable financial decisions for their future. Knowledge is power, and I believe Canadians will eventually overcome their debt crisis.

Although this strategy has been implemented before, other advanced and technological ways should be used to effectively demonstrate importance of making good financial decisions. It may take decades to witness results, but persistence in educating the public will change the debt story in Canada. Above and beyond, payday regulation would significantly help in curbing the debt crisis in Canada. Since more than two million Canadians are depicted to take a payday loan annually, regulating the sector would be a substantial balancing act. According to research, cracking lending industry without establishing an alternative, the lenders will disappear making the consumer to depend on other unlicensed online lenders. Payday regulation has been there before, but people are still borrowing. Severe consequences should be established for individuals violating the policy, and people will evade borrowing in the long-run.

Conclusion

In summary, Mike’s guide is a substantial reflection of most global issues facing many countries today. In his concern about debts, Mike reveals that most households tend to borrow too much, and upon repayment, they are left with limited disposable income. According to statistical data, two third of the debt is linked to mortgages and the remaining portion is split between credit and other loans. Besides, management of household debt is affected by economic blows that lead to problematic debt servicing, high cost of debt servicing and increased interest rates. The prices of houses are vastly increasing; implying people need to borrow more to become house owners. This excessive borrowing will subject the state economy to immense risks and therefore, substantial strategies should be implemented. The central bank should lower the interest rate to prevent consumers from accumulating huge debts. Public literacy and enforcing payday regulation would be essential strategies to evade the current debt concern in Canada.