of debt? as mentioned at the beginning, the term ‘ debt ’ emphasises the borrower ’ s obligation to repay the loan in future. each credit / debt relationship is therefore fraught with the risk that the borrower might incur financial difficulties and be unable to repay the loan. the cartoon here makes a tongue - in - cheek reference to this credit risk ( cf. slide 8 ). naturally, credit risk is also inherent in the case of our university graduate ’ s start - up. there is a rule of thumb in the start - up scene that says only one in ten start - ups succeeds. if her product idea fails, our university of berne graduate will lack the funds to repay her loan and interest. and the miller family ’ s mortgage loan is not exempt from credit risk, either. payment difficulties could arise if, for example, a divorce or rising interest rates lead to an unexpected hike in current expenses, or if the family ’ s future income is reduced by unemployment or illness. in such cases, borrowers will of course do all they can to avoid a default and first of all try to lower other expenses. this may mean cutting back on non - essential consumer spending or postponing maintenance work or investments. a default, after all, has far - reaching in this simplified example, no mention is made of the risk / return considerations that naturally need to be made in such a case. this is also what the empirical literature suggests. an advanced financial system and access to efficient credit provision are closely linked to growth and a high level of prosperity ( cf. beck ( 2011 ) and levine ( 2005 ) ). it should be kept in mind that a modern financial system comprises further key elements besides the credit mechanism, in particular payment systems, market places for trading shares and bonds, and insurance business. page 5 / 16 consequences. in the case of the start - up, it could possibly lead to insolvency. the miller family for their part might be forced to sell the house in an emergency sale. when borrowers face payment difficulties or default on their loan, this also causes problems for creditors. they will have to write off anticipated interest income and may even lose the money lent if the loan isn ’ t secured by collateral. and even if the loan is secured – for instance by real estate – getting a good price for the collateral could prove difficult, depending on the circumstances. credit as a burden for an entire economy the examples show that an actual or impending

vehicles has expanded. while there are several reasons for this abundance of global credit, global integration is almost certainly an important part of the story. saving rates in asia are relatively high and exceed the region's investment needs. in addition, with the sharp rise in the price of oil in recent years, a number of the major oil - exporting countries have seen a large increase in their saving that has outstripped the growth of their investment demand. with the integration of these economies into world markets, and with investors seeking international diversification, new pools of capital have been injected into the global financial system. how is canada faring? how have these developments been affecting the canadian economy? i'll discuss them in reverse order. the implications of abundant global credit are readily apparent. long - term interest rates in canada have been low. even with some back - up in yields in recent weeks, yields on 30 - year government of canada bonds remain well below 5 per cent. the canadian stock market has been buoyant, and risk spreads on corporate debt are near historical lows. household credit and money growth have been strong, and cross - border investment flows have accelerated. the rise in the prices of commodities relative to manufactured goods has reinforced many of these same effects. since canada is a net exporter of commodities and a net importer of manufactured goods, the rise in commodity prices has made canada wealthier as a nation. the increased value of canada's natural resource endowments is showing up in higher domestic stock market prices and increased cross - border investment flows. it has also been a major factor supporting robust consumption and investment growth in canada. and of course it's showing up in a higher canadian dollar. in the past five years, the canadian dollar has gained about 45 per cent against the u. s. dollar. this appreciation since 2002 reflects a combination of factors, the most important of which is the significant increase in commodity prices. the other implication of the rise in the relative price of commodities is economic adjustment, by which i mean the reallocation of labour and capital from weaker sectors to stronger sectors. the manufacturing sector, faced with higher costs for energy and other inputs, new sources of competition from asia, and a stronger canadian dollar, is going through a difficult adjustment. our own surveys suggest that most manufacturers are responding to these challenges by making changes in the way they do business. part of this adjustment has involved reducing employment. in the past three years, employment in manufacturing has