The mantra du jour appears to be that if only we can all become confident again, the nightmare of this financial crisis will disappear. Gerry Harvey put it most poignantly in an interview on the 7.30 Report, in which he commented that:

“The only thing you can put it down to is it’s a lack of confidence. If we can all just get together as a collective and say, ‘Today is the start of a new period in time. We will now have more confidence from this day on’ and we all acted and did that, then maybe we could create something that no other country had ever done.”

Two recent survey reports may give us the crucible in which to test this proposition: on the one hand, we have the uptick in consumer confidence noted in the most recent Australian Newspoll; on the other, we have Dun and Bradstreet’s study of those in trouble with debt collectors.

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The former shows that the economic stimulus package has lifted the country’s mood, with the proportion expecting to be worse off in 2009 than this year falling from 43% of the population to 27%. The latter reports that debt stress is widespread across the community, but especially strong amongst young males in NSW, Victoria and Queensland.

So will confidence win out, or will debt bury us?

Confidence is certainly important in economic performance. A lack of confidence can lead to investment projects being deferred, consumers keeping their wallets closed and so called “multiplier effects” — that a decline in spending in one sector can amplify its way through the whole economy.

The belief that “we have nothing to fear but fear itself” sees the current pessimism as the causa causans of the current crisis. Get confidence back and the economy will recover, as Gerry Harvey mused. In this scenario, the villains are those — like myself — who argue that debt is the main problem. If the Eyeores would only shut up, the rest of us could get our confidence back up and all would miraculously be well once more.

Unfortunately, last time I checked, lenders won’t accept confidence as a downpayment on excessive debt. Dun and Bradstreet’s survey of distressed borrowers found that extremely low levels of debt were responsible for the majority of referrals to debt collectors. In contrast to the government’s exhortations to consumers to be confident and spend over Christmas — and especially to spend that government handout — D&B’s Christine Christian observed that, “To avoid an increase in over-indebtedness in the New Year it is absolutely critical that consumers pay close attention to their finances.”

The irony behind the belief that, to paraphrase The Beatles, “All you need is confidence”, is that an excess of confidence played a significant role in pushing private debt to the astronomical levels it has now reached. It takes a lot of confidence to believe that there’s a fortune to be made in child care, for instance.

Only when those debt levels are reduced will confidence again be warranted, but the scale of reduction needed to return to the genuinely good times of the 1960s is staggering. In 1964, Australians could have paid off all the outstanding private debt with three month’s worth of GDP. Today, it would take one-and-two-third years of toil to achieve the same outcome.

Debt doesn’t have to be zero — the debt that provides working capital to firms and new investment funding is well justified — but debt that is used to finance gambling on share and house prices is worse than useless. Unfortunately, that’s mainly how we accumulated today’s unprecedented levels of debt.

While the overhang of that debt remains, no amount of confidence will turn this crisis around. Gerry Harvey seemed to fear as much when he concluded his above statement with, “I mean, maybe I’m dreaming.”

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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