Expect that rainy day, even as the sun shines (Debt)

+ Cardinal George Pell, Archbishop of Sydney
12 Oct 2003

In Old Testament times Jews were not allowed to charge interest on loans for fellow Jews. Off and on for the first thousand years after Christ, clerics in particular and Christians generally were also forbidden to charge interest. This sharpened further in the Middle Ages when charging interest was considered usury and forbidden. Theologians believed that money was barren, and the value came from human work and brain power. A bit like Karl Marx.

When capitalism began, the role of money changed. Protestant leaders such as Luther and Zwingli continued to believe charging interest was wrong. Calvin was more open, and in England from 1571 civil law allowed moderate interest to be charged. Today money can make money in free markets and if we all lived like St Francis of Assisi the economy would go into meltdown. We are often told now that debt is good. But the interest always has to be paid, interest rates do not stay low for ever, and bad times and too much debt can be destructive.

The latest financial accounts (to June 2003) show that Australian households borrowed a net total of $32 billion during the second quarter of the year, an increase of $10.6 billion on the previous quarter. Bank loans accounted for over three-quarters of this, mainly for housing. These borrowings brought total household liabilities to the end of June to $693.4 billion – roughly the equivalent of $97,800 for each household in the country. This is too high.

Of course, the picture is complicated. Over the last seven years median house prices in Sydney have risen more than 142 per cent, from $192,900 to $467,600. But over the same time the size of mortgages has also increased, with average repayments rising 85 per cent, from $1375 to $2538 per month.

At the same time, NSW leads Australia in credit card debt, having approximately $8 billion owing in July 2003. Nationally, the total debt is $24.58 billion. Average credit card debt has trebled from $1600 per household in 1996 to $4643 in 2003. The English economist John Maynard Keynes argued that when people saved their money and didn’t spend, low growth and unemployment followed. The responsibility for Japan’s economic downturn is often attributed to the preference of Japanese households to save rather than spend. We are told that borrowing and spending drives growth and produces prosperity, provided we don’t overspend. This is only a half truth. In good times, even when they last for years, we must always plan to survive the bad times. Too many Australian families have too much debt. When the dip comes and interest rates rise, we hope it will be mild and not a crash. A false sense of security is always dangerous.