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It's important to remember that every time you use a credit card, you’re actually borrowing money from the bank and that loans are not free money.  The financial institution pays the debt to the store for what you bought. You then pay the money back to the financial institution.

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The drop in the price of oil had a massive effect on Alberta and other energy based provinces, so consumers in those areas were in no condition to shop or make any big purchases such as cars, homes, etc. Improving commodities prices in 2016 will help restore confidence and Canada will get back on track to sustainable growth over the long term.

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·      This video is a short clip explaining what exactly consumer credit and debit is. Before understanding how consumer credit influences the economy we must first understand what consumer credit is. It talks about the different types of credit and how a credit works and the dangers of interest.

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Credit Card Thieves Caught on Tape Using Skimmers

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Consumer Credit and Debt: It's Not Free Money!

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Animation dealing with credit cards and problems you can avoid when using them.

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This video explains how the economy works. It ties in consumer credit and its effect on the economy. It suggests that there are three main forces that drive the economy. Productivity growth, short term debt cycle and the long term debt cycle. It also covers how most of what people call money is actually credit and states “in an economy without credit the only way to increase spending is to produce more but in an economy with credit you can also increase your spending by borrowing”, therefore has more spending allowing incomes to rise in the short term.

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How The Economic Machine Works by Ray Dalio

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Difference Between Excess Debt Forbearance & Voluntary Forbearance

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Consumer credit debate - lenders and forbearance

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In these tough economic times, are lenders changing their policy regarding forbearance? Are they attempting to reach to customers earlier in the delinquency process? Is forbearance always the best solution, for debtor and creditor? What is the impact of higher levels of forbearance on the financial system as a whole?

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The following growth chart shows that residential mortgage growth has stabilized in recent months. Personal loans seem to be up in the month of April, however credit card debt does decrease in the respectful months.

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This article is about Canada’s current household debt being bigger than its GDP. Apparently this is occurring for the first time ever. This website states that the reasoning is not because of spending but because of income. The Bank of Canada and Finance Minister Bill Morneau have said that they believe these record consumer debt burdens and housing booms will present a major risk to the country’s economy.

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OTTAWA - The insatiable appetite of Canadians for cheap credit has been well-documented since the Great Recession, as consumers piled on debt by ever-increasing numbers.

Now, household borrowing has reached a new milestone, of sorts.

For the first time, the level of debt held by Canadians has exceeded the country's gross domestic product as the red ink spilled over in the second quarter to 100.5 per cent of GDP, up from 98.7 per cent during the previous three-month period.

"This indicator is useful in analyzing the debt level of the household sector relative to other sectors in the Canadian economy or for international comparisons," Statistics Canada said in email to the Financial Post.

"It represents a scaling of the sector's debt to a common denominator. In addition, GDP is a broad measure of an economy's ability to service debt."

At the same time, Statistics Canada said the ratio of credit market debt to disposable household income climbed to 167.6 per cent between April and June, from 165.2 per cent in the first quarter of the year.

Total credit market debt was $1.97 trillion at the end of the second quarter, while consumer credit alone, reached $585.8 billion and mortgage debt stood at $1.29 trillion.

Net worth of households increased 1.9 per cent in the second quarter to $9.84 trillion, boosted by a gain in real estate. Household net worth on a per capita basis was $271,300.

'The issue is not debt, it's income," said Benjamin Tal, deputy chief economist at CIBC World Markets. "Debt is rising by about 5.2 per cent year-over-year since mid-2015. But historically speaking, that's not very high. So, we're not seeing an acceleration at the rate of which households are accumulating credit."

"Given that interest rates are so low, this is an environment you'd expect consumer credit to rise to the sky - and it's not. The debt-to-income ratio is not because of the debt accumulating very fast, but rather the income is not rising fast enough to compensate (borrowers)."

The Statistics Canada report came one day after the Bank of Canada cautioned that historic growth in consumer debt - fueled by near record-low interest rates coming out of the 2008-09 global financial and economic collapse recession - would eventually become unsustainable.

Low interest rates "encouraged growth in household credit, leaving many highly indebted," said Carolyn Wilkins, senior deputy governor at the Bank of Canada, in speech in London.

The central bank - along with the International Monetary Fund and other nation-lending organizations - has repeatedly warned that any adverse shock to the economy could push Canadian household balances deep into negative territory. Most affected would be those who have borrowed above their ability to meet mortgage payments in the event of a real-estate crash.

"As the average household income growth slows, we can expect that economic shocks - such as foreign demand shocks that reduce demand for exports or changes in commodity prices that adversely affect a country's terms of trade - will result in more frequent and longer periods of shrinking incomes," Wilkins said.

The Bank of Canada, led by governor Stephan Poloz, and Finance Minister Bill Morneau have said record consumer debt burdens and the housing boom in Vancouver and Toronto present a major risk to the country's economy.

In British Columbia, the government last month imposed a 15 per cent tax on foreign buyers in an effort to cool the market. Morneau, meanwhile, is looking at whether more action is needed following a December move to tighten mortgage down-payment and lending requirements.

"For the next couple of years, interest rates are going to remain close to current levels. As a consequence Canadians can continue to finance this debt," said Craig Alexander, chief economist at the Conference Board of Canada.

"Because there's so much debt, the Bank of Canada can't raise rates very quickly, or to very high levels."
Financial Post gisfeld@nationalpost.com

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Canada's household debt is now bigger than its GDP, for the first time

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OTTAWA - The insatiable appetite of Canadians for cheap credit has been well-documented since the Great Recession, as consumers piled on debt by ever-increasing numbers. Now, household borrowing has reached a new milestone, of sorts.

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How our Economy Benefits from Consumer Debt 

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How our Economy Benefits from Consumer Debt 

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Consumer spending is a crucial part of how our Canadian economy grows. If we don't spend, we run into issues like unemployment and recession. By encouraging the monetary policy, our government makes it possible for consumers to continue to spend by lowering interest and tax rates. As long as debt is controlled and paid when bills are due, our economy and it's consumers will be safe from financial ruins.

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Consumer spending is vital to the economic growth of nations worldwide, Canada included, as long as we don't find ourselves in over our head. While corporations are often chastised for holding a record amount of cash on their balance sheets, it's actually consumer spending that accounts for the lion's share of economic growth. Let's take a closer look at Canada's latest consumer debt numbers from RBC Economics and what they mean to the future of our economy.

Mortgage and Non-Mortgage Debt

There are two main types of consumer debt: mortgage and non-mortgage debt. If you're like most Canadians and you aspire to one day own a home, you'll most likely need a mortgage. Residential mortgage debt includes mortgages with the big banks, as well as non-bank lenders and securitized mortgages. Non-mortgage debt includes all other types of consumer debt, including installment and revolving credit. Common examples of non-mortgage debt are credit cards, lines of credit, and personal loans.

Consumer Debt: By the Numbers

Household credit grew in April by 4.0 per cent year-over-year, following increases of 4.1 per cent in March and 4 per cent in February, according to RBC Economics (Source: RBC Economics - Canadian Credit PDF).

With home prices heading for the stratosphere, residential mortgage growth continues to outpace household credit, as homeowners take on larger mortgages. Residential mortgage growth edged down slightly to 4.9 per cent year-over-year in April, after four straight months of 5 per cent growth.

"Residential mortgage growth has stabilized in recent months and upside risks of renewed momentum are likely to be contained as housing activity is forecast to gradually moderate after a prolonged period of robust price and sales gains," RBC said.

The outstanding balances on non-mortgage debt, including credit cards, lines of credit, and personal loans grew by a modest 1.9 per cent in April year-over-year, following increases of 2 per cent in March and 1.9 per cent in February. When we drill down the numbers even further, we discover that while personal loans are up a whopping 11.8 per cent in April year-over-year, lines of credit and credit card debt are actually down 0.5 per cent and 1.4 per cent, respectively.

"In contrast, the emergence from cycle-lows for consumer credit indicates households have increased their appetite for non-mortgage loans," RBC said. "With offsetting effects, overall low rates of household credit growth will likely be sustained."

Why Consumer Spending Matters

GDP - short for Gross Domestic Product - is a measure of the market value of all final goods and services produced in a country. In developed countries like Canada, the United States, and the United Kingdom, GDP growth is primarily driven by consumer spending. In Canada household final consumption expenditure accounted for 57 per cent of our GDP, according to the World Bank.

A country's GDP figure is often used as a barometer for the overall health of its economy. When consumer spending grows steadily upward, it's usually indicative of a healthy economy. It's important for consumers to keep spending; any slowdown in consumer expenditures will be felt throughout the economy and can lead to higher unemployment rates. With sub-three-per-cent GDP growth forecast for the foreseeable future, it will be challenging for the Canadian economy to grow, especially if households stop spending and taking on debt.

Although consumer spending is important, there can be too much of a good thing. If consumers find themselves saddled with too much debt, it can lead to a slowdown in consumer spending and an uptick in bankruptcies and overall delinquency rates. The Bank of Canada has kept the overnight lending rate frozen at 1 per cent for nearly four years to help encourage consumer spending. If consumer spending slows to a crawl, it can lead to job loss and eventually a recession.

The Bottom Line

Consumer spending is an integral part of a growing economy. If consumers stop spending, it can lead to all sorts of unpleasant consequences, including unemployment and a recession. Through monetary policy, governments can encourage consumers to continue to spend by lowering interest rates and tax rates. Just remember to spend responsibly; only spend money you'll be able to repay when your bill comes due.

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How the Canadian Economy Benefits from Consumer Debt, CreditCardsCanada.ca

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Consumer spending is vital to the economic growth of nations worldwide, Canada included, as long as we don't find ourselves in over our head. While corporations are often chastised for holding a record amount of cash on their balance sheets, it's actually consumer spending that accounts for the lion's share of economic growth.

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This website talks about our monetary policy - which is a set of rules made by the government regarding the amount of money that is in circulation within our Canadian economy. In Canada our monetary policy is conducted by the Bank of Canada - it works to adjust short term interest rates to be consistent with maintaining a low and stable inflation rate.

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The economy is a collection of millions of individual consumers and firms interacting on a daily basis to determine which goods and services will be produced, which firms will supply various products, which consumers will take them home at the end of the day, and what prices will be paid for the many different products. Even in predominantly market economies, such as Canada and the United States, governments at all levels play an important role-they raise revenue by taxing many economic activities, and they spend these resources by providing such services as defence, health care, education, and public housing. Even when governments are not directly taxing or spending, their presence is often felt through the regulations they impose in such areas as product safety, foreign ownership, licences for television stations, quotas for milk production, and minimum wages, to name just a few.

Macroeconomics often glosses over much of the detail in markets for specific goods and services, focusing instead on the behaviour of economic aggregates such as total output, inflation, unemployment, and economic growth. Macroeconomic policy is divided into two broad types: fiscal policy and monetary policy. Fiscal policy is the set of decisions a government makes with respect to taxation, spending, and borrowing. Governments at all levels (federal, provincial, and municipal) have a fiscal policy, since they all have the ability to raise revenues through some form of taxation and to spend these resources on goods and services. There are numerous dimensions to any government's fiscal policy, especially at the federal level, because revenue can be raised through many different taxes, and spending can occur on countless products in different regions and aimed at different beneficiaries.

1.1 What is monetary policy?

Monetary policy is the set of decisions a government makes, usually through its central bank, about the amount of money in circulation in the economy. In Canada, monetary policy is conducted by adjusting very short-term interest rates to achieve a rate of monetary expansion consistent with maintaining a low and relatively stable rate of inflation.

Monetary policy in Canada has three main characteristics:

1. Monetary policy is conducted by the Bank of Canada, a government-owned Crown corporation that operates with considerable independence from the federal government but is nonetheless ultimately accountable to Parliament.

2. Because financial capital can move easily within Canada, interest rates on similar assets are the same across all Canadian regions. As a result, there is only one monetary policy for all of Canada. The Bank of Canada is the sole issuer of legal tender (bank notes) in Canada.

3. Although several economic variables influence monetary policy decisions (many of which will be discussed later), the Bank of Canada has only one policy instrument.

The third point states that monetary policy can do only one thing (compared with fiscal policy, which can do many). This point is worth emphasizing, especially when thinking about what monetary policy is not. The Bank of Canada has no ability to set spending or taxation priorities for any level of government in Canada. Nor does it have the ability to directly regulate labour markets or product markets, although it does play a limited role in the regulation and oversight of parts of the financial system. As important and powerful as monetary policy is, it is much more limited than fiscal policy in terms of available policy instruments.

What is the Bank of Canada's policy instrument, and how is it related to the amount of money in the economy? The Bank's policy instrument is the target it sets for the overnight interest rate. 2 In Canada, commercial banks lend funds to each other for very short periods at the overnight interest rate, a market-determined rate that fluctuates daily. By announcing a specific interest rate (25 basis points above the target overnight rate) at which it is prepared to lend unlimited amounts to commercial banks and a second specific interest rate (25 basis points below the target overnight rate) at which it is prepared to borrow unlimited amounts from commercial banks, the Bank of Canada can keep the overnight interest rate within an announced operating band. Furthermore, by changing its target for the overnight interest rate, the Bank of Canada can alter the actual overnight rate at which commercial banks transact.

As we will see later in the paper, such changes in the overnight interest rate lie at the heart of how monetary policy affects the economy. For now, however, the purpose is simply to illustrate how the Bank's decision to set the target for the overnight interest rate influences the amount of money in the economy. By changing the target for the overnight rate, the Bank influences the entire spectrum of market interest rates, from the yield on 30-day treasury bills to that on 30-year government bonds, and from the rate on 3-month guaranteed investment certificates (GICs) to that on 10-year home mortgages. When the Bank lowers the target for the overnight rate, these interest rates fall, firms and households increase their demand for credit, and commercial banks increase their quantity of credit supplied. (Conversely, when the Bank raises the target, interest rates rise, firms and households reduce their demand for credit, and commercial banks decrease their quantity of credit supplied.)

With an increase in the amount of credit in the economy, there is an increase in the volume of transactions for goods and services, and thus an increase in the overall demand for money with which to make these transactions. Individual firms and households can satisfy their demand for money by making withdrawals from their accounts at commercial banks, often in the form of bank notes. But what do commercial banks do when they begin to run short of bank notes? They can buy them from the Bank of Canada by selling other assets-in particular, government securities. Thus, when the Bank of Canada increases the volume of bank notes in the economy, in response to the greater demand from commercial banks, it does so by purchasing government securities. Such a balance-sheet transaction for the Bank involves an increase in assets (government securities) and an increase in liabilities (newly issued bank notes). 3

Thus, we can see the connection between the Bank of Canada's target for the overnight interest rate, the Bank's balance sheet, and the amount of money circulating in the economy. Changes in the target overnight interest rate lead to changes in other market interest rates and, hence, to changes in the demand for credit, the demand for money, and the demand for bank notes. The Bank accommodates these changes in the demand for bank notes by conducting the required balance-sheet transactions. To some observers it may appear that the Bank can influence both interest rates and the amount of money independently. But this independence is illusory: the Bank's policy decision to change the target overnight interest rate has a direct effect on the eventual change in the amount of money circulating in the economy. There is only one instrument for monetary policy.

This concludes a very broad outline of monetary policy. More detail will be provided later. We now go on to examine why most central banks have adopted the control of inflation as their overall policy objective, rather than the control of variables such as aggregate output, employment, or the unemployment rate.

1.2 Why focus on inflation?

The ultimate objective of the Bank of Canada is to make the best possible contribution to a well-functioning Canadian economy and to the overall well-being of Canadians. Based on a large body of theoretical reasoning and empirical evidence, the policies of the Bank of Canada and most other central banks are grounded in two essential propositions:

High inflation is damaging to the economy and costly for firms and individuals.

Central banks are unable to directly influence variables other than inflation for any sustained period of time.

The costs associated with high inflation will be discussed in detail in the next section. Stated briefly, high inflation generates uncertainty in the economy, and this uncertainty interferes with the smooth functioning of a market economy, which relies on fluctuations in market prices to reflect changes in the scarcity of various products. The costs associated with this uncertainty explain why central banks attempt to maintain low and relatively stable rates of inflation.

But low inflation is only one of a large number of potentially desirable goals for economic policy. Central banks might also desire to keep the unemployment rate low or the rate of growth of aggregate output relatively high. After all, low unemployment and high rates of growth would mean higher real incomes and higher average living standards. This brings us to the second proposition above-the limitations on what can be achieved by monetary policy.

Arguments put forward most eloquently by Milton Friedman (1968) explain how monetary policy can influence many macroeconomic variables over short periods of time-including real output, unemployment, and investment-but can have a sustained influence only on the rate of inflation. In the late 1960s, these arguments were controversial and not fully accepted by the economics profession, but over the next decade they became widely accepted as more theoretical reasoning and empirical evidence emerged in their support. Central to the argument is the recognition that the changes in real wages and real interest rates that are initially generated by a monetary policy action are eventually offset by market adjustments in wages and interest rates in response to excess demands or supplies. Thus, a monetary policy action that in the short run can lead to a change in output and employment, in the long run, ends up changing only the rate of inflation. Almost 40 years later, Friedman's basic arguments regarding the limitations of monetary policy are so well entrenched in the profession's view that they appear in textbooks as core material.

Over the same few decades that Friedman's ideas were becoming widely accepted, there was another growing recognition, based on the experiences of many countries over many years, that significant differences in inflation rates had more to do with differences in monetary policy than with any other single macroeconomic variable or policy. This is not to say that no other factors have an effect on a country's rate of inflation; only that the single largest explanation for different inflation rates across countries is the difference in monetary policies. This close empirical relationship between inflation and money is shown in Chart 1, which plots the average annual rate of inflation against the average annual growth rate of the money supply for a broad cross-section of 38 countries from 1962 to 2003. 4 The annual averages are computed over many years to emphasize the long-run trends in the data and thereby avoid the empirical irregularities associated with short-run economic fluctuations. Obvious in Chart 1 is a clear positive correlation between inflation and money growth-in other words, countries whose money supplies grow quickly also tend to have high rates of inflation. 5 Canada appears in the lower bunching of data points, with average annual inflation of 4.6 per cent and average annual money growth of 8.5 per cent.

To summarize, central banks choose to focus on maintaining low and relatively stable inflation for two reasons. First, low inflation is beneficial for the operation of the economy. Second, both theory and evidence suggest that monetary policy cannot have a systematic and sustained effect on macroeconomic variables other than the inflation rate. Given this limited scope for monetary policy, it would make little sense for monetary policy to adopt other long-run targets, such as the unemployment rate or the growth rate of real output. It is natural for central banks to adopt a long-run target for the one thing that they can reasonably expect to influence over the long run-the rate of inflation. 6

That is why the Bank of Canada takes the view that its best contribution to the health of the Canadian economy is to maintain low and relatively stable inflation. To formalize this objective, the Bank, in 1991, together with the Government of Canada, adopted a system of inflation targeting that aims to keep the annual rate of inflation close to 2 per cent and within a range of 1 to 3 per cent. In such an environment of low and stable inflation, Canadian firms and households can then make spending, saving, and investment decisions that lead to steadily rising average living standards.

Given the strength of the theoretical and empirical evidence regarding the long-run effects of monetary policy, some observers may wonder why central banks failed to focus so intently on inflation much earlier-back in the 1980s or even the 1970s. Quite simply, what is now much clearer to many central banks and economists was anything but obvious at that time. Economists have learned much from the world developments and policy mistakes of the past few decades. More lessons will be learned in the future, and perhaps some events will transpire that will lead central banks to adopt different policy regimes. But, until then, our best reasoning and evidence continues to suggest that monetary policy aimed at maintaining low and stable inflation makes a great deal of sense.

We next discuss two central questions regarding the success of Canada's monetary policy. The first is how Canada's inflation performance has changed over the years, and why this matters. The second is the extent to which the growth of aggregate output in Canada is more stable in recent years, and why this greater stability is important for the well-being of Canadians. We then examine some details about how monetary policy actually works and what central banks require in order to conduct policy effectively.

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The economy is a collection of millions of individual consumers and firms interacting on a daily basis to determine which goods and services will be produced, which firms will supply various products, which consumers will take them home at the end of the day, and what prices will be paid for the many different products.