Listener: 17 December, 1988

Keywords: Literature and Culture;  Macroeconomics & Money; Political Economy & History;

I was unable to attend the entire Mansfield centenary conference but I did get to the opening lecture, a brilliant inaugural address by Vincent O’Sullivan, professor of English at Victoria University.

Mansfield’s status as a New Zealander has always been a problem, because she spent so much time overseas. But O’Sullivan convinced me that in a very important respect she was not a European, and was able to break out of the European set patterns of thought more easily than her English contemporaries.

This was particularly necessary after World War One. We are familiar with Viscount Grey’s August 1914 remark that ‘the lamps are going out all over Europe; we shall not see them lit again in our lifetime’. Who then would be able to see through the gloom?

O’Sullivan argues that because of her New Zealand background, and because she was one of the first civilians to report on the devastation on the western front, Mansfield was one of the leaders, with the Americans, in post-war literary development.

This intellectual adjustment was required in other areas including the economy, for that war broke the dominance of the European economy, and the British hegemony in the world financial system. While best known for his contributions to macroeconomics, much of John Maynard Keynes’s work was in trying to find a new global financial system. Coincidentally he was the Gower Street (in London) landlord of Mansfield and her husband, Middleton Murry, and a member of the Bloomsbury group.

This came back to me while reading the London Economist of the same week as the Mansfield conference. In it there is an article struggling with thinking through national debt-funding strategies. I use the word ‘struggling’ for it is not often that the Economist admits to making an analytic error.

The reason it is having to rethink such issues is that in 1979 world real interest rates began to move up by about two to four percentage points above the rate of inflation. This might be attributed to a change in policy of the US central bank, the Federal Reserve, under Paul Volcker, but there are almost certainly fundamental changes we do not yet understand, The change was not as spectacular as after the assassination of Archduke Ferdinand in 1914; economically it may be more fundamental.

There is a subtle but crucial mathematical relationship between real interest rates and real growth rates. If the Economist became confused over it, this column’s aspirations must be limited. But ultimately, a borrower has to have their income grow faster than the interest rate they are paying on their debt; otherwise they are in difficulties in the long run,

So if real interest rates shift up two to four percentage points, then for a borrower to stay in business they have to get their economic growth rate up by the same amount, That is not a very realistic policy, so practically the borrower who wants to avoid long-run disaster has to move to a higher-savings strategy.

It is not easy to come to terms with today’s world where, unlike the past, real interest rates are higher than the real growth rate. My guess is that the fallout from the financial crash of last year is going to be much longer than we might hope because high interest rates are going to eat into companies’ cash flow, dragging some down, and destabilising the rest. Consumers will face similar problems.

Perhaps I should emphasise the mathematics gives a long-run result. While the world goes through this high growth, debt-accurnmulating burst, the outcome is obscured. We could wobble on for years without coming to terms with the insistent logic. It will be as painful a period of adjustment as this century has seen. It could go on well into the next.

I am reminded of a forecasting seminar I attended in Paris in 1985. The mainly American audience was uncritically optimistic and unconcerned by the enormous debts that the US economy was building up. At the back of the room, an Australian business economist and I provided polite (in my case anyway) dissent. International debt has been a major issue for both our countries for over a century , and the experience sheds light upon those who are joining us. But we were not listened to.

It would be good to report that this distinctive Australasian perspective has led to economic policies better adapted for the new world economy. Alas it is not true for New Zealand. Instead we have slavishly, and extremely, followed the international fashions.

It was like that in 1914, when we uncritically followed the British leader to fight in a war on the other side of the world, sacrificing so many of our youth. Mansfield lost a brother and a lover, and that tragedy flows through her work. The recent national unemployment march on Parliament reminded me of that tragedy of the soldiers marching to war.