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Why We Can't Stop Spending -- Canadian Business article

AlannaJohnson

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Why We Can't Stop Spending, Canadian Business, Feb 28, 2011
by Matthew McClearn


http://www.canadianbusiness.com/managing/strategy/article.jsp?content=20110222_145647_15048

Hi all, got up earlier than usual last nite and was in a reading mood; this article from the recent edition of Canadian Business caught my attention. I thought it was very interesting & telling. Italics emphasis is mine.

Some highlights of this multi-page feature article:

Post recession, many Canadian consumers vowed to be thrifty, yet those desires never materialized. Canadians cut spending only mildly and briefly. Stats Can reported a non-tax spending reduction of just 0.7% in 2009 (That same year, our British counterparts noted a 3.4% reduction in household spending.) CIBC economist Benjamin Tal is quoted as saying "the recent surge in spending is not backed up by rising consumer fundamentals"; in fact it "has actually coincided with a drop in the ability of households to spend."

Savings increased only modestly. Back when Canadians were really frugal in the early 1980s, they saved as much as 20% of disposable income. However household savings rate has been in decline for a generation, hovering at 2-4% in the five years leading up to the recession. Following the recession, savings rate averaged just over 4% over the past four quarters. CGA-Canada reports that one third of non-retired Canadians save nothing, not even for retirement.

Canadians piled on debt. Ratio of debt to disposable income for Canadian households has more than doubled over the past 20 years, and is now at a record of 148%. CGA-Canada reported that "while growth rates of mortgages slowed over 2008-2009, the pace of expansion of consumer credit accelerated." RBC poll last May noted that 27% of ordinary Canadians are "up at night worrying about payion off their debt."

Article then asks: "Why are we spending our way toward oblivion?"

And suggests some of the reasons...

"It's a question of self-control, and our current spending and debt levels suggest a collective loss of it." Yet the matter seems to be more complex than that. Harvard law professor Elizabeth Warren paraphrased in the article argued that for a generation, America's middle class has been caught in a vise of stagnant incomes and rising expenses. Two-income households have become increasingly common and the "lot of single income households worsened markedly." Stats Can 2009 survey found that "the average Canadian household spends 64.4% of its income on personal taxes, food, shelter, and transportation combined -- the so-called necessities." Yet also spends $1500/yr on smokes & alcohol, and more than $4000/yr on recreation, which the article suggests could be used towards debt repayment & savings.

Recently CGA-Canada surveyed consumers on the interest rate charged on their credit card balances. "More than half had no clue -- they thought they were paying 3-4% when most are in the double digit rate, often the high teens."

The Feds' 2009 Task Force on Financial Literacy: "Many Canadians lack some or all of the skills, knowledge and confidence necessary to be financially literate."

Other reasons...

"our observed bias toward immediate gain over long-term benefits"

Also

"keeping up with the Joneses" It used to be that competition was largely confined to neighbourhoods, i.e. people of similar incomes. What's new is how people make these comparisons. "Seeking to explain American spending patterns more than a decade ago, economics professor Juliet Schor (now teaching at Boston College) believed members of the middle class were no longer competing only against their neighbours. Rather, they'd begun comparing themselves to people earning three, four, even five ties their salary. This transition could be in part to blame on fictional TV shows which present a higher proportion of high-income characters than found in the actual population. The result: a growing mismatch between median incomes and aspirations."

Government measures to stave off the recession such as the rock-bottom overnight rate, as well as incentives such as the home renovation tax credit achieved the desired result, but also plunged the population into higher levels of debt. Article says that while the low interest rates persist, they will work against recent Fed gvt. measures to tighten credit such as eliminating 35-yr amortization mortgages.

The article concludes by predicting a spike in consumer insolvencies and bankruptcies, but does mention that according to a CIBC report in late January, a "shift to thrift" has begun. "After rushing back to shop in 2010, consumers will take a well-deserved break in 2011."

Thoughts anybody? The biggest shockers to me were the financial illiteracy of consumers (e.g. answer to the credit card rate q'n), as well as the keeping up with the 'richer Joneses' concept.) Certainly food for thought for many of us.

 

hinz

New member
Nov 27, 2006
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Hmm...wouldn't be the SPs/MPAs vested interest to have financially illiterate and spendthrift hobbyists? No? :rolleyes:

BTW, one does not need to learn how to spend. Savings and risk taking to invest for the long term OTOH are hard work and it never ends.
 

djk

Active member
Apr 8, 2002
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the hobby needs more capitalism
This is why I want to be an entrepreneur.

So many idiots out there, living way above their means. Why the fuck should Bell, Future Shop, Nissan and other big brands be cashing in on this rampant stupidity. Sign me up, I need to milk the morons too. :D
 

hinz

New member
Nov 27, 2006
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So many idiots out there, living way above their means. Why the fuck should Bell, Future Shop, Nissan and other big brands be cashing in on this rampant stupidity. Sign me up, I need to milk the morons too.
LOL, maybe you should milk the morons by owning the sin stocks, say investing tobacco, defense and alcohol. :cool:

Or if you want to be brave, speculate in private prison contractors, say Correction Corporation of America.

So much opportunity for strong Loonie, yet so "little" cash to invest, LOL
 

SkyRider

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Mar 31, 2009
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There's more stuff to spend money on to-day than there were back in the 1980's. 30 years ago there were no personal computers, no Internet, no cellphones, no iPads, no digital cameras that are "upgraded" every 6 months, etc.

I suspect that people are also spending more money on medicine and "personal improvements" whether they need it or not.
 

hinz

New member
Nov 27, 2006
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There's more stuff to spend money on to-day than there were back in the 1980's. 30 years ago there were no personal computers, no Internet, no cellphones, no iPads, no digital cameras that are "upgraded" every 6 months, etc.
That's what I call gadget porn for a reason-they all get you hot and excited but not necessarily lead to anything productive. :rolleyes:
 

Hangman

The Ideal Terbite
Aug 6, 2003
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www.fark.com
This is why I want to be an entrepreneur.

So many idiots out there, living way above their means. Why the fuck should Bell, Future Shop, Nissan and other big brands be cashing in on this rampant stupidity. Sign me up, I need to milk the morons too. :D
Buy stock in the companies you named. Let them do the milking for you.
 

djk

Active member
Apr 8, 2002
5,953
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the hobby needs more capitalism
I was thinking about businesses such as payday loans, coffee shops, perhaps even a lottery. However, I suspect the government has a monopoly on that stupid tax through anticompetitive law.

Basically, businesses with high margins, low overhead and that target people who are horrible with money.
 

djk

Active member
Apr 8, 2002
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the hobby needs more capitalism
There must be 800 million coffee shops in Toronto. I keep tripping over them.
The ones near me are always full with long lines. And I know many people who pay using a loyalty card. In other words, transferring their funds to the coffee shop, having the coffee shop collect interest and if the balance isn't used by a certain date, its lapses.
 

hinz

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Nov 27, 2006
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The ones near me are always full of people with laptops.
Sounds like Starbucks. :rolleyes:

BTW, be very vigilant on ladies loyal to Starbucks as this could be a warning signal of high maintenance, WASPY, "Bohemian", suburban and more importantly spendthrift BIG TIME.

That being said, there is always an exception but too many of those types buy/got brainwashed by the so-called paying a premium for "lifestyle" at Starbucks.
 
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