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The shopping spree is over for consumption-mad countries Add to ...

As Prime Minister Stephen Harper, U.S. President Barack Obama and British Prime Minister Gordon Brown urge banks to resume lending, a commentary from the Bank for International Settlements provides a clinically clear perspective.

The BIS report argues that "high leverage was a key cause of the financial crisis. ... Bank balance sheet leverage built up because trading books could be easily funded in the wholesale debt markets ... leveraged structured mortgage products were highly sensitive to adverse shocks to housing markets. In addition, insurance and hedging strategies made leverage seem safer than it had before."

Now here is the BIS report's punch line: "The first dilemma is how to prevent a severe contraction of viable credits to households and non-financial firms, while at the same time facilitating an orderly reduction of excessive leverage in the financial system."

How indeed. Squaring the need for additional lending with the fact that high leverage was a key cause of the financial crisis is a seemingly impossible task. If too much debt got us into this mess, then how will more debt get us out?

There is no question that restoration of normal credit lines to small and medium-sized businesses is absolutely crucial if we are to prevent this financial tsunami from washing away enterprises so important to our economy. But restoring personal credit is another matter.

As political leaders urge consumers to return to shopping malls and auto dealerships with patriotic messages such as: "Show confidence in your country"; the question is, "With what?" Consumers have been living beyond their means during a decade-long shopping spree fuelled by debt. Zero equity mortgages, house flipping, multiple maxed out credit cards and deferring car payments until next year regardless of your credit rating drove average household debt in the United States and Britain to almost twice disposable income, the highest in the world. Canadian household debt is quite a lot lower at 1.4 times, but even this doesn't tell the whole story.

U.S. and British house prices have fallen much more dramatically than in Canada, and negative home equity is effectively another form of debt. While Canadians' debt wall isn't nearly as high, the reality is that it will take the next decade to pay off the household debts accumulated during the past decade, so the buying spree is over here, too.

If this weren't bad enough news for the retail, auto and housing sectors, there's the demographic reality that population growth is stagnant in the United States and Canada and is falling in Western Europe and Japan. And then there's the silver tsunami. The over-60 age group in these countries is expected to increase to more than 25 per cent of the population during the coming payback decade. As people approach retirement, they spend less because they've already accumulated what they need and are more frugal with their retirement funds.

The bottom line is that consumer markets in Western developed countries have peaked, and will never again return to their former level.

Then there are governments, the biggest debtors of all. As Mr. Obama implores Congress to approve an $800-billion (U.S.) stimulus addition to a previously projected deficit of $1.2-trillion, heavily indebted governments in Europe and Japan roll out their own deficit-funded bank bailouts and stimulus packages. The multitrillion euro, yen and dollar question is: "How will they ever pay it back?"

Unlike Canada, these countries continued deficit spending in the boom years and now they face the demographic reality of a declining taxpayer base struggling with rising interest costs on national debts. Canada faces the same demographic reality, but from a stronger financial base ... so far. All the more reason for our Conservative government to resist knee-jerk calls for even more spending before the ink is dry on the last deficit-bulging budget.

Just as debt-fuelled consumerism in the developed countries drove the job-creating industrialization of the Asian workshop countries, the deleveraging-dictated decline of Western consumerism has the opposite effect. Recent GDP and job loss data show that intra-Asian trade and rising national demand have not immunized China from a precipitous drop in exports to the West. Nevertheless, China holds two aces in this great global game: more than $1-trillion of reserves and a population of savers versus debtors. This means that Beijing has the funds to help weather the storm without incurring national debt, and that many consumers have the capacity to spend some of their savings as confidence returns.

Many of the old adages apply here: what goes around comes around; you reap what you sow. Well, it'll soon be payback time for both individuals and governments who have dug themselves into a great debt hole. History will record it as the disastrous fallout from the bundling of bad loans for resale to investors that ended centuries of Western consumer market dominance.

But when the books are written on this tumultuous time, how many will say that an end to ever-escalating consumerism was inevitable? And raise your hand if you think that living with a little less stuff doesn't have to mean living less.

Gwyn Morgan is the retired founding CEO of EnCana Corp.

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