Why Carney's caution is warranted

It will be years before we know whether Mark Carney rates among the best governors the Bank of Canada has ever had. But he's already one of most fascinating. Why? Because he's not afraid to contradict mass opinion.

A year ago, as a key decision on interest rates loomed, a dozen Bay Street economists were unanimous, urging him to cut. He didn't. Several months later, with the world still in the grip of a paralyzing financial crisis, those same economists were busy changing their forecasts from "grim" to "apocalyptic." Mr. Carney's central bank put out a sunny forecast for a big rebound in 2010.

So now that investors have bought into the recovery and are celebrating the arrival of an economic spring, guess who's out in the field with his boots on, stomping on the baby plants?

"Old adages usually contain great wisdom," the Governor told an audience in Regina, before unloading this chestnut: "Just as you don't count your chickens before they are hatched, we shouldn't presume that green shoots today guarantee a bumper crop tomorrow." Because, as the good citizens of Saskatchewan know, "it is a long, anxious time between the appearance of seedlings and the harvest."

What a downer. But he's right to talk with an edge of caution. While a lack of confidence is a terrible thing, overconfidence in the recovery might be just as dangerous if it prompts Canadians to do the wrong thing. This isn't the 1990 recession. The national balance sheet looks different this time, and it demands a different response - from the consumer, above all.

Back then, the big problem was chronic, enormous government deficits. Yes, we're deeply in the red this year, and the Tories are spending as if Jack Layton were secretly running the Finance Department. But Ottawa is still far less indebted now, with debt of about 30 per cent of gross domestic product. The provinces and other, lower-level government bodies are in equally good shape, despite their growing deficits.

What about corporations? That's an even more compelling story. Bloodied in the early 1990s, once prosperity was in place, they began to repay debt with alacrity. And repay, and repay. Or, just as often, their profits grew to the point where the debt didn't matter very much. Think of a firm like Rogers Communications, which once lived on the knife edge of insolvency but now carries an $8.5-billion debt load with ease, and you have a microcosm of Corporate Canada's balance sheet over the past 15 years.

Canadian businesses exited the '90s recession saddled with nearly as much debt as equity, or net worth. Not this time: They entered this downturn with debts of just 50 per cent of net worth. Those figures exclude banks and other financial companies, but as everyone knows, Canadian banks were paragons of thrift compared to U.S. or British banks.

So far, so good. But then we have the consumer.

Canadians have not gorged on cheap mortgages and lines of credit the way Americans have, and haven't stuffed their wallets with as many credit cards. But the differences are of degree, not direction. We still participated enthusiastically in the credit boom, as the attached chart shows. We may think we're a lot more responsible than Americans at the cash register. Truth is, we are just a little bit more responsible.

The numbers also say Canadian households have barely begun to bring down their household debts. A corporation that suffers from too much debt can sell a division, or find new equity partners, or merge with a healthier company. (If these fail, there's always bankruptcy protection.) A government can raises taxes or invent new ones (goods and services tax, anyone?) - or, as a last resort, let the printing press run harder and longer, and allow inflation to work its painful magic.

But an individual debtor has fewer options. Sure, he can sell assets - but that's hard to do if his primary asset is his home. He can try to increase his pay - but incomes are nearly stagnant and will be until well after growth has resumed. Probably the best he can do, short of winning the lottery, is sweat it out. "Consumer deleveraging" - economist jargon for people paying down their debts - is likely to be a slow process. Which means the recovery will be so, too.

Canadians are starting to save more. But the personal savings rate was still below 5 per cent in the first quarter, and it's going to have to go higher, for longer, before a strong recovery can truly take hold. Is that what Mr. Carney sees? It makes sense to me.