Australians are Grasshoppers not Ants

Everyone knows Aesop’s fable of the Ant and the Grasshopper.  The fable concerns a Grasshopper who spends the summer singing while the ant stores up food for the winter.  When winter arrives the Grasshopper starves, and upon asking the ant for food, is chastised for its idleness.   Australia has experienced the longest summer in our short history but Australia has failed to put away for the inevitable winter, with savings rates today being 31.6% less than in 1985. Not only have we failed to save for the future, we have compounded the problem by borrowing to fund our long summer; the balance on our credit cards is now 533.3% more than in 1985.

Credit card debt has increased dramatically in Australia since 1985 (start of RBA records).  The nation’s current credit card balance, as of June 2009, stands at around $44 Billion or $1869.00 per person. In 1985 the credit card balance was only $2.5 Billion or $166.66 per person; accounting for inflation and population increase, that’s 533.3% more than in 1985.  The real scale of consumer indebtedness is difficult to ascertain as every year consumers consolidate their debt into personal loans, reducing their credit card balances; from talking to industry insiders, this accounts for approximately 50% of personal loans.

At the same time, Australia’s savings rate has declined. It has declined steadily from 1985 at points reaching negative levels when personal spending exceeded income. It would be reasonable to assume that savings would track income but unfortunately this has not happened.  In fact 25 years ago when real income was 31.6% less than it is now savings rates were 231% higher than 2009 levels.  All this is in spite of the fact that income increased substantially.  We earn, adjusted for inflation and population growth, 43.8% more than people did in 1985.

Some economists would argue that debt itself isn’t a problem, referring to the Money Multiplier effect. The best way to describe this is to use an example; let us use a consumer buying a car financed through a personal loan.  The consumer buys the vehicle, the sales person gets a commission, the bank employee who provided the loan gets paid, the sales person orders another car, the manufacturer employs staff and also buys metal from mining companies who pay royalties and employ staff.  All those who earn more along the chain also spend, and so the cycle continues.  As long as incomes keep pace with rising debt, there isn’t any problem.

Other economists do take a negative stance against consumer debt. Funding consumption through debt leads to problems.  The concept consuming through debt and yet maintaining your current standing of living is predicated on incomes continuing to rise, which is not a given.  Australia has experienced one of the biggest economic booms in history, with real incomes today (2009) being 47% higher than they were in 1985. At some point the economic boom will cease.  The burden of the debt will hamper consumption putting a “break” on the economy and driving down Australians quality of life.

Investment in infrastructure (factories, ports, public transport) and accumulation of capital (for domestic and overseas investment) are long term drivers of economic growth.  Using debt to fund consumption, when the majority of goods consumed are imported, exponentially reduces Australia’s capacity to save,  and to fund infrastructure and the accumulation of capital.

At some point the winter will come and we will regret the long summer of singing and spending.  Real incomes will drop as we have not invested anything to sustain us into the future.  While we may hope that the ants will share and we won’t be chastised, realpolitik is seldom so forgiving.