Canadians Sitting on Cash Mountain

[August1991]

Risk-averse Canadian households are sitting on up to $1-trillion of cash and “near-cash” holdings, earning next to nothing, Scotia Capital Inc. says in a new research report.

...

“Two particular slope shifts have occurred, one after Y2K, the dot-bomb bubble and 9/11,” Mr. Holt and Ms. Cordes wrote. “The rate of cash accumulation then accelerated after mid-2007.…

“There are multiple drivers, but we think the dominant one is excessive complacency and risk aversion on behalf of households when managing their finances,” they said in their report.

“Maybe a portion of that is risk-aversion that is not unjustified,” Mr. Holt said.

“But when you get into that magnitude of very low yielding – after inflation and taxes – holdings of these assets over such a long period of time, I think it is very hard to justify on risk aversion or being conservative because you are only hurting yourself over the very long term.”

...

The estimate of $972-billion sitting in cash and near-cash holdings includes currency holdings, deposits of all types and short-term paper such as treasury-bills and commercial paper. The economists included unincorporated businesses in their analysis because “the lack of incorporated status means that households are on the hook for the liabilities of those businesses, and households are the claimants to their assets,” they said.

Stripping out fixed-term deposits, which are not fully liquid, the total still comes to $635-billion.

“It is useful to put such holdings in perspective by comparing them to appropriate benchmarks,” the economists wrote.

“The narrower measure of cash and near-cash holdings that excludes all fixed-term deposits equals 40 per cent of total Canadian equity market capitalization, 9 per cent of total household sector assets, 46 per cent of their total liabilities, two-thirds of their after-tax incomes and nearly 70 per cent of consumer spending.”

G&M

This 30,000$ per capita statistic includes unincorporated business (makes sense) and fixed deposit instruments (makes sense too). And of course, an average is just that: some Canadians have no cash holdings while others have over $60,000.

I would imagine that something similar is happening in the US too but perhaps not as pronounced as in Canada. OTOH, the recent shift to cash has probably been more rapid in the US whereas in Canada, it has been a steady process over the last few years.

An important factor unmentioned in the article is that inflation is close to zero. This makes the real interest rate on cash close to zero (whereas before it was negative).

-----

Underneath everything, this cash hoarding explains the current economic downturn. Canadians (and Americans) have shifted their a larger portion of their portfolio into cash.

Why? Aside from all the Keynesian reasons for holding cash, I think there is an element of existential crisis in the baby-boom generation. They are facing retirement and death and they are afraid.

[jdobbin]

Why? Aside from all the Keynesian reasons for holding cash, I think there is an element of existential crisis in the baby-boom generation. They are facing retirement and death and they are afraid.

They could be waiting for big sales too.

Edited September 28, 2009 by jdobbin

[Jerry J. Fortin]

Yet another attempt by the banking industry to worm its way into your pockets!

[OddSox]

Yet another attempt by the banking industry to worm its way into your pockets!

Huh? Where did that come from?

[Jerry J. Fortin]

It comes from 50 years of life in this nation. The untapped wealth of the people is now being eyeballed by the financial spin doctors as potential that may be utilized to some advantage. Now seriously folks, just exactly whose advantage does you think that will be? Has anyone ever seen a financial advantage to the citizen?

We can't even get our government to declare our mortgages tax deductible! Think about that for a minute. The roof over top of a business is a tax deduction for them, but not for the pond scum citizen. All under the guise of an economic model that serves the interest of business not the citizen.

[GostHacked]

It comes from 50 years of life in this nation. The untapped wealth of the people is now being eyeballed by the financial spin doctors as potential that may be utilized to some advantage. Now seriously folks, just exactly whose advantage does you think that will be? Has anyone ever seen a financial advantage to the citizen?

We can't even get our government to declare our mortgages tax deductible! Think about that for a minute. The roof over top of a business is a tax deduction for them, but not for the pond scum citizen. All under the guise of an economic model that serves the interest of business not the citizen.

I saw it the same way. OMG people are sitting on piles o cash. You know you are better off investing it than sitting on it. At least sitting on it is not a risk of loosing it. But then again, the banks are making money on money we have in the bank. Or is all this simply cash in a shoebox someone is storing at their house?

Either way, banks win.

[Jerry J. Fortin]

I saw it the same way. OMG people are sitting on piles o cash. You know you are better off investing it than sitting on it. At least sitting on it is not a risk of loosing it. But then again, the banks are making money on money we have in the bank. Or is all this simply cash in a shoebox someone is storing at their house?

Either way, banks win.

Both the monetary system and the financial industry needs reforms.

[whowhere]

Why? Aside from all the Keynesian reasons for holding cash, I think there is an element of existential crisis in the baby-boom generation. They are facing retirement and death and they are afraid.

They should be with what they let mulroney and harper do to this country.

[whowhere]

It comes from 50 years of life in this nation. The untapped wealth of the people is now being eyeballed by the financial spin doctors as potential that may be utilized to some advantage. Now seriously folks, just exactly whose advantage does you think that will be? Has anyone ever seen a financial advantage to the citizen?

We can't even get our government to declare our mortgages tax deductible! Think about that for a minute. The roof over top of a business is a tax deduction for them, but not for the pond scum citizen. All under the guise of an economic model that serves the interest of business not the citizen.

People need to start demanding parity with the US. The US citizen deducts their mortgage interest and they enjoy lower retail costs on Food and other items. Canada's ability to compete on a level playing field is going to be a must if the dollar reaches parity. Canada's economic model of relying on the US to generate its economic prosperity is repugnant. Canada's model is to export products to the US and over retail taxCanadians on what they need to sustain a living. It's not right and needs to be addressed.

In spite of the US woes, the US still doesn't have GST. If the US can function without it, so can Canada.

[OddSox]

It comes from 50 years of life in this nation. The untapped wealth of the people is now being eyeballed by the financial spin doctors as potential that may be utilized to some advantage. Now seriously folks, just exactly whose advantage does you think that will be? Has anyone ever seen a financial advantage to the citizen?

We can't even get our government to declare our mortgages tax deductible! Think about that for a minute. The roof over top of a business is a tax deduction for them, but not for the pond scum citizen. All under the guise of an economic model that serves the interest of business not the citizen.

Aren't you overdoing this? The report pointed out that people in Canada are saving their money. Period. They are not being forced to do so by anyone, unless I missed something. If you don't want to save your money, I don't believe there is anything stopping you from spending it as you choose - or maybe even investing it by starting a business?

As for tax-deductible mortgages - sure. But then the house becomes an asset which is then subject to capital gains, the same as any business.

All under the guise of an economic model that does its best to serve citizens' interests just as well as businesses - they are both essential to our economic well-being.

Edited September 28, 2009 by OddSox

[Sir Bandelot]

The reason is mainly due to 9-11, IMO. Other factors before and after may have contributed, but they are probably just part of a normal economic cycle that waxes and wanes. But 9-11 was the game changer.

Its constantly amazing how much the 9-11 attack has affected us. We are not yet fully aware of its ramifications, in terms of its impact on economics, cultural and demographics. Somehow when those tremendous icons of western capitalism were brought down, it created a fundamental shift in our values. The damage did not only come directly from the attack on the very symbols of western capitalism, but it also changed our collective psyche, world wide. Suddenly people became sick of buying useless items and unnecessary junk luxuries. This is the death of mass consumption, and it has happened to us without the influence of business or government reforms. It is happening silently, a silent revolution, across the board and in large numbers. Our society is undergoing a subconscious transformation.

We have known for generations, that we've excessively squandered resources and caused damage to the ecosystem. Yet despite all the information, campaigns and efforts to make people more aware of their excesses, nothing really changed. Blame human complacency, where there's no fire why do we need water. Well, on 9-11 we saw a fire alright, and it burned itself into our consciousness, a catastrophe, even steeped in the ancient symbolism of towers struck down.

What I'm seeing is most people are trying to do more with less, being satisfied with less, making do with what they have. Learning to make things themselves instead of buy them. But its not just simple resignation to the current financial crisis we find ourselves in, its more than that - it's intentional. Some of the people I know are not hoarding cash, they don't have much extra. They are aworking less, making less income and in some ways enjoying it more.

[bush_cheney2004]

...What I'm seeing is most people are trying to do more with less, being satisfied with less, making do with what they have. Learning to make things themselves instead of buy them. But its not just simple resignation to the current financial crisis we find ourselves in, its more than that - it's intentional. Some of the people I know are not hoarding cash, they don't have much extra. They are aworking less, making less income and in some ways enjoying it more.

Nothing particulary new here....cutting back to less still doesn't compare to previous generations, especially the Great Depression. Somehow, no longer having an Xbox, Wii, and PS3 just doesn't seem quite the same as no food or clothing.

[Riverwind]

The US citizen deducts their mortgage interest

It is an idiotic policy that simply drives up real estate prices since real estate prices at set primarily by what people can afford to pay. All tax deductions do is increase what people can afford which leads to higher bids on property until the market prices settle down at a higher level. The net result is people are no better off financially unless they happened to own a home when deduction was put in place. The downside is one's personal residense becomes a source of taxable income when sold and the policy also penalizes people who pay down their mortages by forcing them to pay higher taxes into order to subsidize the people with mortgages.

and they enjoy lower retail costs on Food and other items.

That difference has been declining over the last decades thanks to free trade. It will never be the same because the Canadian market is smaller which means less competition and higher overheads as a percentage of sales.

In spite of the US woes, the US still doesn't have GST. If the US can function without it, so can Canada.

The US is running deficits at 10% GDP. There system is not sustainable and they will have to raise taxes sooner or later. It is unlikely the political culture in the US would allow the introduction of a GST but that only hurts the Americans since the taxes still have to be extracted and they will likely use much more inefficient mechanisms such as payroll taxes.

[Jerry J. Fortin]

Sounds like a view from a small business person! We all know what those folks think about the pond scum getting any kind of a tax break.

The truth is that making mortgage payments tax deductible doesn't have to mean they become taxable, that might be how it works down south but this is not down south and we can write our own laws thank you very much.

In addition, when you are talking about improving the standard of living, home ownership is a key segment of the equation. Higher standards of living translates into lower crime rates. A side benefit to the deal! So it is a two for one deal for citizens.

As far as the rise in the price of real estate goes, I call bullshit! That is a market driven thing called supply and demand, you may have heard of it before but perhaps you didn't think that it applied to real estate or something but it does. The price or housing is relative to the rate of employment and the local standards of living and local costs of living. In short, real estate is a very large variable in most locations and subject to local conditions.

[msj]

As far as the rise in the price of real estate goes, I call bullshit! That is a market driven thing called supply and demand, you may have heard of it before but perhaps you didn't think that it applied to real estate or something but it does. The price or housing is relative to the rate of employment and the local standards of living and local costs of living. In short, real estate is a very large variable in most locations and subject to local conditions.

So, you call BS and then go on to prove yourself wrong.

Well done!

[Jerry J. Fortin]

So, you call BS and then go on to prove yourself wrong.

Well done!

I think you need to read that again. Maybe you will understand it the second time around.

[OddSox]

The truth is that making mortgage payments tax deductible doesn't have to mean they become taxable, that might be how it works down south but this is not down south and we can write our own laws thank you very much.

So, where does the missing tax revenue come from after you write your own laws?

[kimmy]

It comes from 50 years of life in this nation. The untapped wealth of the people is now being eyeballed by the financial spin doctors as potential that may be utilized to some advantage. Now seriously folks, just exactly whose advantage does you think that will be? Has anyone ever seen a financial advantage to the citizen?

I read it the exact same way as you: PR from the bank industry.

When I read "Canadians have large amounts of underutilized cash and are missing out on significant investment income", what I read is "please, folks, buy some of our mutual funds and investment services."

Is anybody here actually happy with the way their investments have performed over the past several years? They were doing a pretty mediocre job with my assets before The Big Crash of last year, and I'm scared to look at my holdings ever since. And they're disappointed that people aren't investing more money with them?

People aren't investing money because investing money has produced such dismal results and people have been burned badly several times in the past decade.

Unjustified risk aversion? In light of recent events I don't think peoples' mistrust of bankers, banks, investments, and stocks is "unjustified" at all.

The reason is mainly due to 9-11, IMO. Other factors before and after may have contributed, but they are probably just part of a normal economic cycle that waxes and wanes. But 9-11 was the game changer.

9-11 was just after the implosion of the tech-bubble, and I propose that the collapse of the tech bubble has a lot more to do with peoples' reluctance to invest than the collapse of the twin towers.

Many Canadians had their retirement fortunes invested in companies like Nortel, which plunged from over a hundred dollars a share to a couple of bucks. People went from comfortable nest-eggs to practically nothing in the span of just weeks.

Nothing particulary new here....cutting back to less still doesn't compare to previous generations, especially the Great Depression. Somehow, no longer having an Xbox, Wii, and PS3 just doesn't seem quite the same as no food or clothing.

During the Great Depression, a lot more people were employed creating the necessities of life-- food, clothing, manufactured goods... now most of our food can be produced by a tiny proportion of the people, and clothes and manufactured goods can be purchased by the ton from cheap foreign sources. Video games and movies and nights on the town might be frivolities that people can easily do without, but they're a much bigger part of the economy than they used to be. The economy needs people to keep spending money on these frivolities or jobs disappear.

-k

[jdobbin]

Although, I said it to be amusing, there is a lot of truth in what I have said. People hold cash in some cases because they believe there is deflation.

Why buy a house at top dollar if you can get it cheaper a few months from now?

[Riverwind]

The truth is that making mortgage payments tax deductible doesn't have to mean they become taxable, that might be how it works down south but this is not down south and we can write our own laws thank you very much.

The tax code is pretty careful about creating loopholes that can be exploited. If interest deductions are allowed then captital gains will be taxable.

In addition, when you are talking about improving the standard of living, home ownership is a key segment of the equation.

Give people an across the board income tax cut and let them spend it on what they want instead of pressuring them into borrowing money for a home. This entire crisis was created by US laws designed to encourage home ownership so it is mystery to me why you would want go down that policy rathole.

As far as the rise in the price of real estate goes, I call bullshit! That is a market driven thing called supply and demand

Guess what dude: allow tax deductions for mortgages and the demand goes up, however, the supply is limited by geography in most cities. What that means is the prices have to rise until the supply can meet the demand. It is basic economics and it means real estate agents and home builders are the only people who benefit from such a policy.

But the higher prices are not the worst part of the such a plan. The worst part is the richer people who take on large debts for expensive homes get the largest tax subsidy. I can't see any justification for favouring that group of people.

[Jerry J. Fortin]

The tax code is pretty careful about creating loopholes that can be exploited. If interest deductions are allowed then captital gains will be taxable.

Give people an across the board income tax cut and let them spend it on what they want instead of pressuring them into borrowing money for a home. This entire crisis was created by US laws designed to encourage home ownership so it is mystery to me why you would want go down that policy rathole.

Guess what dude: allow tax deductions for mortgages and the demand goes up, however, the supply is limited by geography in most cities. What that means is the prices have to rise until the supply can meet the demand. It is basic economics and it means real estate agents and home builders are the only people who benefit from such a policy.

But the higher prices are not the worst part of the such a plan. The worst part is the richer people who take on large debts for expensive homes get the largest tax subsidy. I can't see any justification for favouring that group of people.

Look Riverwind, it isn't to complicated to follow. We can and have learned from American mistakes in the past and we are quite capable of doing so in the future. Lets take this step by step shall we,

1) Primary residences need not be considered taxable unless business was undertaken within the home, we can do that

2)Blaming the entire financial crisis on the US sub-prime issue is a stretch, almost delusional in fact

3)Having the demand for housing go up isn't necessarily a bad thing, even if prices do go up to some degree because there are a lot spin offs that we could surely use, as in a manufacturing sector.

4) I think it is safe to say that a family that gets to deduct interest payments from their taxes would realize a real and tangible benefit that would result in a tax refund of somewhere between 2k to 5K a year for a family.

5) Tax refunds would likely be spend within the marketplace which fuels consumer confidence and strengthens the market.

At any rate this move would bring needed tax relief to Canadians raising families. I would never say no to a tax cut, and would of course prefer no income taxes at all, but that would not happen in Canada because there isn't enough politicians with the balls to do it.

Edited September 29, 2009 by Jerry J. Fortin

[msj]

I think you need to read that again. Maybe you will understand it the second time around.

I think you need to understand what you write prior to posting it.

You talk about how house prices are related to supply and demand and incomes and the COST OF LIVING.

Guess what?

Make mortgage interest tax deductible and this impacts the cost of living.

The market eventually balances out with higher prices.

Sure, there is a timing effect here - just like it is best to buy a house early when interest rates are low (because as interest rates are low they lower the interest cost of buying the house which means that house prices eventually shoot upwards to compensate - all other things being equal) - so to will it be beneficial for a while until it isn't anymore.

[Riverwind]

1) Primary residences need not be considered taxable unless business was undertaken within the home, we can do that

We can also take the money spent and give to everyone in an across the board tax cut.

2)Blaming the entire financial crisis on the US sub-prime issue is a stretch, almost delusional in fact

Did you ever take the time to investigate why US banks started relying on mortgage brokers and securitization in the first place? Government pressure to promote home ownership was one of the catalysts. Do you known that banks in the US are actually penalized if they don't make enough loans to minorities in the US - credit worthiness is not enough to justify loan rates that do not match the demographics in a neighborhood. To much government social engineering was one of the causes of the crises and it should not be forgotten.

3)Having the demand for housing go up isn't necessarily a bad thing, even if prices do go up to some degree because there are a lot spin offs that we could surely use, as in a manufacturing sector.

Higher housing prices hurt people who are not in the market because it takes them longer to save the necessary downpayments.

4) I think it is safe to say that a family that gets to deduct interest payments from their taxes would realize a real and tangible benefit that would result in a tax refund of somewhere between 2k to 5K a year for a family.

And a family that works hard and pays off their mortgage gets nothing. Please explain to me why you want take more tax money from the savers who buy homes less than what they theoretically can afford and give to the spendthrifts who overextend themselves.

5) Tax refunds would likely be spend within the marketplace which fuels consumer confidence and strengthens the market.

Cut taxes for everyone. Fairer and accomplishes the same result.

[Jerry J. Fortin]

I think you need to understand what you write prior to posting it.

You talk about how house prices are related to supply and demand and incomes and the COST OF LIVING.

Guess what?

Make mortgage interest tax deductible and this impacts the cost of living.

The market eventually balances out with higher prices.

Sure, there is a timing effect here - just like it is best to buy a house early when interest rates are low (because as interest rates are low they lower the interest cost of buying the house which means that house prices eventually shoot upwards to compensate - all other things being equal) - so to will it be beneficial for a while until it isn't anymore.

I understand that demand will go up. I understand that prices will follow. I also understand that home ownership increases net worth, and adds value to the local economy. Which local economy does better? One of owners, or one of renters? The owners are better off are they not?

[msj]

I understand that demand will go up. I understand that prices will follow. I also understand that home ownership increases net worth, and adds value to the local economy. Which local economy does better? One of owners, or one of renters? The owners are better off are they not?

So, it is obvious that you don't understand what you posted in that first post .....

Maybe try changing the subject with someone else.

At least we know that Canada is hitting the bubble phase for real estate when nonsense like the above is being spilled.