In the last year, since the onset of the global financial crisis, we have apparently moved from feelings of despair and anxiety to feelings of hope and renewal – with positive GDP figures, a booming stock market and, despite a rising unemployment rate, a belief that it can be contained. Even junk bond issues have resurfaced.
However, all this has a cost. In the preceding year governments of every political persuasion around the world collectively threw about eighteen trillion dollars at solving the GFC problem. From the statements made previously they appear to have succeeded better than they or we could have expected. In Australian idiom, governments have created a magic pudding that just goes on giving. Does this mean that normal transmission will be resumed shortly and we can return to our profligate ways? I think the answer is no, but as we are living through an era of make believe I thought it might be interesting to look at the “Magic Pudding” analogy.
The Magic Pudding is an Australian children’s story written in 1918 by the well-known Australian artist Norman Lindsay . He bet that a children’s book about food would sell better than one based on fairies. He was right as the book has been in print ever since. In the book, Albert, the magic pudding, is in the hands of Barnacle Bill and Sam Sawnoff who try and hide it from potential thieves. I say ‘in the hands of’, as it seems ownership is a touchy subject because the pudding was previously in the hands of a ship’s cook. The ship sank and the cook, Bill and Sam were marooned on an iceberg. Bill and Sam were starving but the cook had the pudding, which he kept hidden, to feed himself on. In an ensuing fracas, Bill and Sam steal the pudding and (according to the pudding) roll the cook off the iceberg into the sea where he apparently drowns.
The pudding, described in the book as “a cut- an’- come-again Puddin’,” is a cantankerous character that wants to be eaten so that it can regenerate itself. The story revolves around attempts by two thieves to steal the pudding. We thus have a story about ownership of a limitless source of food that those who know about it will go to great lengths to protect or steal.
I first came across the magic pudding analogy in 2005 when the Howard government changed the superannuation rules so that the over 55s could work, make salary sacrifices into their super funds and draw down a partial pension at the same time (to augment the income salary sacrificed). At the end of the day, because of changed income tax rules, it was possible to end up with more super even as you were consuming it – hence the magic pudding.
The Magic pudding analogy has been used in recent times to describe two periods, each quite different but related to each other. Firstly, the ten year period of the Howard government before the GFC, when the booming Chinese economy enabled the Australian government to reduce taxes and simultaneously increase spending. The economy kept growing and the government found itself with large reserves and no government debt to speak of. During this period, thrift receded into the background as a virtue, as it was easy to borrow, jobs were plentiful and companies everywhere were offering inducements for people to buy now and pay later. The Australian dollar value was low so imports were very cheap. Government debt disappeared during this period as the responsible mantra required them to run a balanced budget. However, in the same period corporate and personal debt rose to unprecedented levels on the back of low interest rates.
Secondly, the post-GFC period of Labor government stimulation undertaken in a period when credit was almost impossible to obtain. Here we witnessed the government going into deficit to the tune of $58 billion (small beer on the international stage, but in relative terms one of the biggest stimulus packages) and corporations and individuals reigning in their debt levels as never before. From a population with a net savings outflow, Australians started to save again and companies started issuing shares like there was no tomorrow to repay debt that could no longer be rolled over. The government stimulus package here was seen by some observers as another magic pudding as the fiscal multiplier payoffs from individual handouts and infrastructure spending (sadly neglected in the previous decade) worked to keep spending up and unemployment low. Companies found that they could make share issues at a discount to the market and more than $70 billion in shares was issued in 2009.
Thus a magic pudding economy is seen as one where you get back more than you put in – where you appear to get something for nothing. Governmental stimulus packages are seen as temporary phenomena that will reverse themselves as the world economy recovers and the debt can be paid down in a timely fashion. Unfortunately the real world is not that simple. Assumptions about future behaviour abound and slight trends are extrapolated to indicate that the cavalry will be here to save us in no time. Frankly I am suspicious.
If we look at Lindsay’s actual story in more detail, rather than rely on a few commentators’ hazy recollections of it from their childhood, we find a set of circumstances that can provide insight into our current predicament.
In the story, Albert, the pudding, is not a friendly character at all. He is an angry pudding, and Bill says that there there’s nothing he enjoys more than offering himself to strangers. This is not out of politeness but as the pudding says “It’s simply a matter of putting on pace”. Bill adds that the pudding’s mania is that it is always anxious to be eaten. The Pudding sings a ditty “Eat away, chew away, munch and bolt and guzzle, never leave the table till you’re full up to the muzzle.”
The pudding is difficult to control – running away if not tethered, and Bill and Sam are always having to fight off pudding thieves as well as having altercations between themselves. Thus the pudding as well as a source of great value is a constant source of conflict between all participants. The pudding is always looking for owners who will eat more of him and is only pacified by being eaten. Bill lies about how he came by the pudding and the pudding is only too willing to disclose this to anyone who will listen.
In the story, the pudding is strong and always knows what it wants, namely, more use by others. The characters exposed to him are generally greedy, often prepared to go to extreme lengths to secure exclusive access to the pie: to lie, cheat, and possibly kill. It is accepted in the story that the material benefits provided by controlling the pie are worth the costs involved. The characters are also weak in that they want exclusive control over the pudding when it could possibly feed the whole community. The story is a sad reflection on the values of those involved, with the odd exception.
Increased economic growth, through increasing consumption has been a major goal of governments and corporations for the last half century or more. Education is seen as a means to a better job and increased standard of living and any attempts to ameliorate the effects of global warming are seen by many politicians and commentators as moves to destroy jobs and the economic standard of living, as if these are inviolate goals. The values of acquisitiveness seem paramount – just keep spending and everything else will fall into place.
If we apply the pudding analogy to modern times, there are three ways of looking at it. Firstly, we could view the credit created by the banks, fund managers, mortgage providers and financial planners during the period up to the GFC as a magic pudding. For them it appeared to be and they wanted to retain exclusive control over its creation and management, knowing that with credit the velocity of circulation was the key factor – the faster it circulated, the more fees and wealth were generated for the lenders and more consumption was created in the economy. The view was that more consumption was always a good thing, and there was no thought for the consequences of those borrowing or lending. The calamities of the GFC show this not to be the case. Credit is tool that needs to be kept on a well-regulated chain. Unleashed aggressively it can cause untold damage – ask the owners of homes bought with credit much greater than the value of the homes or shareholder in banks that lent too aggressively, as they did in Iceland and Ireland.
The cycles of accelerating credit availability and then hard braking on that availability has resulted in much greater volatility in all finance markets. This has generated a series of booms and busts, paradoxically in an age of ever-greater modelling of risk that has attempted to reduce or eliminate it. I suspect that the fancy maths in use just made the situation worse by generating a herd mentality among banks and brokers that exacerbated volatility rather than ameliorating it.
From the government perspective, the pudding is represented by the stimulus packages. Governments are paying people and businesses to keep spending, when natural caution would indicate that they should save more.
Credit has always been a two-edged sword –a boon if you can repay it and a monster if you cannot. It is no magic pudding – it does not have the capacity to keep giving – as bankers erroneously believed. We know that credit is a genuine aid to wealth-building when used appropriately, but a destroyer of communities when used injudiciously. It took the major economies more than 20 years to recover from the Great Depression, with an enormous absolute loss of wealth, and it appears we have not learned the lessons from it.
The consequences of the last credit binge are a debt overhand of a magnitude that almost defies understanding – at the personal, corporate, and now, government level. What we know is that if the stimulations fail to generate a recovery, the capacity of governments to engage in a second round of stimulation is going to be severely constrained and recovery will be long and slow.
Thirdly the pudding denies the concept of a finite world of resources. We can eat our fill and keep coming back for more as it has been mysteriously replenished, and we need never query how this has been achieved. There is a tendency to look at the world’s resources in this way – clean water, clean air, grains, fruit and vegetables, meat and fish as infinite resources that can be consumed by a growing population ad infinitum – all you have to do is look at the shelves in the supermarkets. As recovery returns to developed economies, there will be a tendency to want to return to prior unsustainable levels of consumption. However, we know this is only possible in a children’s story, not in the real world. In the poorer parts of the world, where survival is a daily struggle for food and water, this reality is nothing new. If we consume the world’s resources, there will be no magic replenishment, but denial and doubt are powerful tools.
If it does nothing else, the GFC should be awakening us to the reality that surrounds us, but I fear that ears and eyes are already being shut to the resources issue and people are retreating to their electronic cocoons and shutting reality out. Now, if the bank will just lend me a few hundred thousand, I’m sure I can squeeze in one additional slice of pudding.
Norman Lindsay, The Magic Pudding, Angus & Robertson, Sydney 1918, reprinted by New York Review of Books Children’s Collection, New York, 2004.