Have we learned nothing?

If we keep buying now and paying later, we may well come face to face with another financial crisis.

Do you think that the 2008 financial crisis is well behind us and that the same type of thing will not happen again? Well some, myself included, disagree simply because nothing has been learned from the past crisis.

To date, the central banks have shown remarkable creativity in their efforts to contain the damage and stall for time. Admittedly, they have succeeded, although the consequences of low interest rates and massive injections of cash into the economy are uncertain.

The trouble is, we haven’t tackled the causes of the crisis. The bottom fell out in 2008 because the banks and other financial institutions went on a lending spree and consumers accumulated massive debt.

There is no free lunch — this is an inescapable economic principle. What we buy on credit today we have to pay for tomorrow. And this is a lesson we learned the hard way in 2008, along with the ensuing consequences.

If we don’t change our mind-set and behaviour, if we continue to live beyond our means and buy now, pay later, we’ll come face-to-face with that inescapable principle again.

Canadians have record-high debt, hovering around 164% of disposable income. This means the average Canadian owes $1.64 for every dollar he or she has earned during the year. More than half of Canadian workers (51%) live from paycheque to paycheque and would have trouble making ends meet if their cheques were delayed by even one week.

Enticed by low interest rates, Canadians continued to rack up debt during and after the crisis, in part because of the real estate craze that has swept the nation. Credit bureau TransUnion estimates that in the five years following the crisis, inflation rose 9%, but nonmortgage debt — credit cards, car loans and lines of credit — soared by 37%.

As a recent Financial Post article pointed out, it should come as no surprise that the Canadian automobile industry has done so well for itself since the crisis. Most of the recent increase in consumer debt comes from car loans, which can now be repaid over eight years.

Instant gratification

Far be it from me to pass judgment. I’m as much a part of consumer society as anyone else. But our lives seem to be increasingly structured around a "spend-centric" economic system. Marketing experts bombard us with an endless stream of consumer goods, many of which turn into impulse purchases that many of us really can’t afford. We have become accustomed to instant gratification or we want to keep up with and even get ahead of the Joneses.

Take a look at people around you and their lifestyles. Look how easy it is to fly south every winter or upgrade your car to the latest model. According to the salesperson, the car will not cost you $25,000, but just $189 a month. Today’s marketing strategy focuses on the possibility of consuming things that might have been previously unaffordable to you.

Not surprisingly, governments are heading down the same path, accumulating debt and postponing payment. After all, they are a reflection of their voters. They also operate on the short term and "shop" for votes on credit.

The world’s central banks can also be accused of encouraging consumption and credit and discouraging saving.

But one day all of us will have to change our consumer and voter mind-set. Otherwise, a recurrence — again and again — of the financial crisis is a likely possibility, no matter how many rabbits the central banks pull out of their hats in a bid to buy time.