Beware of Central Bank Quacks

Man suffers heart attack. Cardiac specialist asks about the patient’s lifestyle. Breakfast, lunch and dinner consists of a Big Mac, fries and a soft serve cone.

The artery clogging, fat creating diet is then washed down with the thickest of thick shakes followed by a couple of ciggies.

Cardiac specialist nods knowingly and says ‘I see the problem’.

Without the slightest hesitation, the good doctor prescribes the following remedy for his patient’s ailing body…‘double your daily intact of Big Macs, fries, cones, thick shakes and smokes’.

The prescribed treatment is met with great relief from the patient’s nearest and dearest.   Time to party.

I know what you’re thinking, ‘that’s a totally implausible scenario’.

Is it?

Let’s change the characters around and see if you still think the same way.

The global financial system suffers a near death experience in 2008.

The cause of the economic body’s cardiac arrest? The Fed suppressed interest rates for too long…encouraging a binge in subprime debt.

Asset prices — from Iceland to Ireland and Wall Street to Main Street — were inflated to bubble levels.

Debt defaults — resulting in the collapse on Lehman Brothers — caused the system to struggle for oxygen.

What did the economic doctors prescribe as a ‘cure’ to this debt crisis? More of the same that caused the problem in the first place. Lower rates and more debt.

What would pass as sheer, unadulterated quackery in the medical profession, is somehow hailed as heroic in the field of economics.

Go figure.

Central banks — the RBA included — are run by quacks

What other possible conclusion can you draw about people who think you solve a debt crisis by creating more debt?

They are certifiably insane…as defined by Einstein’s definition of insanity…‘doing the same thing over and over again and expecting different results’.

Yet, none of the economic commentariat dares to question the mental (in)stability of those charged with prudently (now there’s a laugh) managing the economy.

After a decade of ‘cure’, are we in a healthier position?

Sydney Morning Herald 17 June 2019…

A growing number of Australians are falling behind on their mortgage, hit by weaker house prices and high levels of debt as more signs emerge that consumers are leading the economy down.

Property Observer 18 June 2019…

Australian RMBS [Residential Mortgage Backed Securities] delinquency rates, which rose slightly over the three months ended 31 March 2019, will continue to increase over coming quarters, according to the latest report from Moody’s Analytics.

You get the picture. Indebted Australian households are struggling. Why?

The RBA — in all of its profound wisdom — slashed rates to encourage households to borrow…and they did. Australia now has one of the highest household debt-to-GDP ratios in the world.

Well done RBA. Trying to cure a debt crisis with more debt. Pure genius.

So what’s the answer? More (lots more) of the same.

Bloomberg 18 June 2019…

Australia’s central bank is likely to lower interest rates again to drive increased hiring and boost households’ confidence that inflation will return to target.

The Reserve Bank made the comment in minutes of its June 4 policy meeting, when it eased the cash rate to 1.25% in the first reduction in almost three years.

And what’s with this inflation target that’s so critical to achieve?

Why doesn’t anyone ever question the sanity of a policy that wants to make everything 2–3% more expensive in 12 months’ time?

According to the Australian Bureau of Statistics (ABS), the CPI basket consists of 11 major groups…

  • Food and non-alcoholic beverages
  • Alcohol and tobacco
  • Clothing and footwear
  • Housing
  • Furnishings, household equipment and services
  • Health
  • Transport
  • Communication
  • Recreation and culture
  • Education
  • Insurance and financial services

Which of these goods or services do you want to pay more for next year?

What’s that…you don’t want to pay more?

Didn’t think so.

Why then do people blindingly believe that inflation is good for us? It makes no sense whatsoever.

The quacks running the show have managed to convince all and sundry that paying higher power bills or more school fees or dearer food prices is something that should be targeted.

Seriously?

The real benefit in inflation is it reduces the value of debt. And when you’ve created and nurtured an economic growth model that‘s hopelessly addicted to debt, you want inflation.

The agenda is to create a nation of debt slaves…for generations to come.

But creating the central bankers much coveted inflation is proving elusive…and, not just in Australia.

As reported by Reuters on 18 June 2019 (emphasis is mine)…

The European Central Bank [ECB] will ease policy again if inflation fails to accelerate, ECB President Mario Draghi said on Tuesday…

In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required,” Draghi told the ECB’s annual conference in Sintra, Portugal.

The problem is that with rates at record lows and the ECB’s balance sheet already swelled to 4.7 trillion euros ($5.3 trillion), its remaining ammunition is limited, raising doubts about the likely effectiveness of any further measures.

In spite of historically low interest rates (zero bound for almost five years) and trillions in stimulus (buying government and corporate debt) inflation is nowhere to be seen.

Click here to watch the full video interview with The Rum Rebellion’s Greg Canavan and Richard Hayes, CEO of The Perth Mint.

So what’s the prescribed remedy?

Draghi wants to take rates even lower and pump out even more stimulus. If this is not the action of a lunatic, I don’t know what is.

Central bankers have proven beyond a shadow of doubt that when it comes to acting in our long-term interest, they have absolutely no idea.

They are wedded to a theoretical growth model that no longer works in practice. It may have worked OK during the 50s, 60s, let skip the 70s, 80s and 90s…but it is now well and truly broken.

There is simply too much debt in the system.

India and China have mobilised a labour force that did not exist in the golden decades of Western economic dominance.

The developed world population is ageing.

The dynamics have changed, but the modus operandi of central banks has remained firmly stuck in a bygone era.

Which is why Ambrose Evans-Pritchard published an article in the Daily Telegraph on 7 April 2019, titled…‘Can the world’s central banks rescue the slowing global economy even if they try?’

Here’s an extract:

The fear is palpable. Central bankers and policy strategists gathered at the intimate “euro Davos” on Lake Como are shell-shocked by the collapse of bond yields and recessionary warnings across the world.

Monetary ammunition is exhausted or running low across the G10 economic universe. The US Federal Reserve has been stripped of key tools needed to fight a financial crisis. It may not be able to rescue the international system as did in 2008.

The eurozone is sliding into a “Japanese” deflationary quagmire but without Japan’s political cohesion and without a fiscal machinery to step into the breach.

Lifelong advocates of Europe’s monetary union fret — behind the doors at the magnificent Villa…

When the next crisis hits it looks like we’ll have to take our real medicine…the quacks have all but exhausted their supply of voodoo remedies and potions.

The RBA and other central banks can push on the interest rate string…but if it hasn’t worked by now, what’s a few more rate cuts going to do?

People may borrow more…clogging the arteries of the economic body with greater amounts of junk debt.

The economic body is going to suffer another attack…there’s nothing surer. This next one is going to make 2008 look like a case of mild indigestion.

Regards,

Vern Gowdie

PS: In an exclusive new video interview, Greg Canavan talks all things gold with Richard Hayes, CEO of The Perth Mint. Click here to watch it now.


Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.


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