Experience shows that high debt levels can amplify the impact of a shock on the economy, such as a rise in unemployment. This is because some borrowers could default on their debts, leading financial institutions to lend less, or even fail. Meanwhile, governments with a high debt load may be less able to stimulate a faltering economy.
In Canada, household indebtedness is our most important financial vulnerability. The latest data show household debt is 177 percent of disposable income, a bit below last year’s record high, but still elevated. For some countries it is the stock of government debt that causes the most concern. US government debt is more than 100 percent of GDP and rising quickly.