Since 2008, Central Banks Have Compromised Our Economy

It’s such a strange feeling.

I knew it was coming…picked it a few years ago.

Yet, I feel such a mix of emotions…anger, frustration, sadness.

It’s weird…like some sort of mini-grieving process.

In trying to self-analyse, I think the feelings come from deep seated disappointment and an acceptance of what’s in our future.

The RBA’s decision to cut rates on Tuesday was predictable.

Yet, I held out the faintest of hope that our country would be different.

That our independent Aussie spirit would kick in and enable us to ‘dance to the beat of our own drum’.

That somehow our central bank would exercise critical thinking and see — from the failed experiments in Japan, Europe and the US — that pushing on the interest rate string is not the answer.

Sadly, the RBA let us all down.

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The RBA let us down

Our central bank is nothing more than a sycophant…the Fed’s boot licker.

Harsh words?

No…not harsh enough.

The Reserve Bank’s inability to learn from or ignorance of history, has set us up for monumental failure.

Over the centuries, society has advanced by learning from the mistakes of our predecessors.

The rapid progress in technology, medical science, space travel and health, is all thanks to our willingness to learn, adapt and evolve.

Yet, when it comes to markets and the economy we’re no more advanced than the tulip buyers of 400 years ago.

Boom. Bust.

We think we’re smarter, but our actions prove otherwise.

In our nation’s history, Australian households have never been more indebted.

And history tells us emphatically that debt bubbles always — without exception — burst.

Debts are defaulted on. Businesses go bankrupt. Creditors lose money.

That’s how debt is expunged from the system…very, very painfully.

This is what’s in our nation’s future…a prolonged period of financial and emotional turmoil.

And the blame for this hardship will lay fair and squarely at the feet of the RBA…shame on them.

My anger stems from knowing that the fate awaiting overly-indebted Aussie households and businesses was largely avoidable.

Today I’d like to share with you an edited extract of an article I wrote recently.

How actions of the central bank have impacted economy

The article explains why the actions of central banks since the 2008 debt crisis have seriously compromised the health of the economy and financial markets

In October 2010, Dr. Mohamed A. El-Erian (the then CEO and co–Chief Investment Officer of giant US fund management firm PIMCO) was invited to present the prestigious Per Jacobsson Foundation lecture.

The title of his presentation was…

 “Navigating the New Normal in Industrial Countries”

The Global Financial Crisis had brought the easy borrowing and free spending days of pre-2008 to an abrupt end.

In the aftermath of crisis, people were struggling to understand what the “new normal” meant.

Society had become conditioned to believe continuous asset price growth fuelled by increasing levels of debt, was normal.

To quote from the lecture (emphasis is mine)…

“…the causes of the crisis were many years in the making and included balance sheet excesses, risk management failures at virtually every level of society, antiquated infrastructures, and outmoded governance and incentive systems in both the public and private sectors.”

Every level of society — government, central banks, corporate and household — bought into the notion that a virtuous cycle of debt and asset price growth was a sign of economic strength.

With each passing year, lending standards went lower and asset prices went higher…GDP growth soared.

During the boom years of 2003 to 2007, US GDP growth was around the 5 per cent per annum level.

United States GDP Growth Rate 04-07-19

Source: Trading Economics

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The longer this pattern (of insanity) continued, the greater the conviction became in this being “normal”.

And, I can tell you from personal experience, no amount of reasoned argument to the contrary could sway the majority from this entrenched belief.  

As we found out in 2008, it was all a giant Ponzi scheme.

Without the injection of vast amounts of debt, the US economy (as measured by GDP) plummeted into negative territory.

This reality check, was the ‘new normal’ that society — at all levels — was grappling with.

With hindsight, we know central banks and governments desperately wanted a return to the ‘old normal’…asset prices and consumption levels driven higher (and higher) by an easy money policy.

To assist you in visualising the difference between the global economy (and financial system) of 2007 and today, here’s a photo. The fellow on the left is 2007…

Largest body muscles man in the world 2015 Steroids UK 04-07-19

Source: Largest body muscles man in the world 2015 Steroids UK

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The coordinated efforts of global central banks to (relentlessly) pump “steroids” into the economic body since the events of 2008, has delivered an outcome that is anything but normal…it’s grotesque.

Yet, the majority don’t, won’t or can’t see it.

We blindingly accept that as long as the GDP needle remains in the positive, all’s good with the world.

The IMF produce charts on (past, present and future) global GDP growth as a form of reassurance that all is ‘normal’ with the world…and that those nasty dips in the growth trend are ‘abnormal’.

IMF DataMapper Real GDP growth (Annual percent change) 04-07-19

Source: IMF

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In the interest of full disclosure, what the IMF (and the Fed, RBA et al) should produce in tandem with the GDP charts is the chart on global debt growth…because it’s the debt growth that’s feeding economic ‘growth’.

Global debt still piling up 04-07-19

Source: Financial Times

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In 2007, global debt — a result of “balance sheet excesses, risk management failures at virtually every level of society, antiquated infrastructures, and outmoded governance and incentive systems in both the public and private sectors.” — was (a mere) US$150 trillion.

Today, it’s over US$250 trillion…an injection (literally) of an additional US$100 trillion into the system.

The problem with using GDP as the sole metric of growth — without providing full context of how that growth has been achieved — is completely misleading.

GDP is simply a measurement of spending (from earnings, savings and borrowings) within the economy. It does NOT measure whether the quality of the spending was good or bad.

Was it spending on consumption (necessary and unnecessary) or investment?

A dollar spent on a (credit card financed) drunken night out carries the same weight as a dollar spent on productive machinery.

The only thing GDP growth tells us is…more was spent today than yesterday.

Big deal.

Yet, this useless piece of information is what politicians, central bankers, treasury officials and economist await with bated breath each quarter.

In recent years, that growth is becoming harder to come by…even with a near doubling in global debt levels.

Like the over-stimulated body builder, there’s a limit to excessive muscle development.

More steroids have less and less effect.

This is known as “The Law of Diminishing Marginal Utility”.

In fact, there’s a point where too much of a “good thing” can be hazardous to your health.

According to drugs.com, the common side effects from anabolic steroid use are…

  • liver disease, such as liver tumors and cysts
  • kidney disease
  • heart disease, such as heart attack and stroke
  • altered mood, irritability, increased aggression, depression or suicidal tendencies
  • alterations in cholesterol and other blood lipids
  • high blood pressure
  • gynecomastia (abnormal development of mammary glands in men causing breast enlargement)
  • shrinking of testicles

There are parallels between the human body and the economic body.

In his 2010 lecture, Dr. Mohamed A. El-Erian remarked (emphasis is mine)…

“…the international monetary system suffered a “sudden stop” two years ago1—a cardiac arrest if you like—the adverse impact of which is still being felt today by millions, if not billions, of people around the world.”

The economic body is displaying some of the side-effects from too much debt steroid.

  • Mortgage stress can lead to depression and suicidal tendencies.
  • Abnormal development of asset prices has resulted in the enlargement of the disparity between the “haves and have nots”.
  • Increased debt servicing costs are the cholesterol build-up in the economy’s arteries…blocking the flow of money on continued consumption.

Ignoring these tell-tale signs of abuses, eventually leads to major organ failure.

Corporate collapses. Bank failures. Sovereign defaults.

If the ‘sudden stop’ in 2008/09 was akin to ‘a cardiac arrest’, then the next credit crisis could prove to be fatal to the economic body as we know it.

Central banks and governments will undoubtedly resort to even bigger stimulatory efforts to make Lazarus rise again…but there’s no certainty it’ll work for a fourth time.

The three previous three revivals being…the dotcom bubble, the US housing bubble and the current, everything bubble.

For a simple explanation on the impact good and bad spending has on the economy, please watch this short 3-minute video produced by 720 Global, titled “The Virtuous Cycle.

There’s a point where the private sector reaches debt fatigue.

Whereas, the public sector can, in theory, accumulate unlimited debt and buy that debt with newly minted currency. Japan is doing this.

How this experiment plays out fully, is as yet, unknown.

But, the question remains, “if this course of action is touted as sound economic management, then why hasn’t it been used before?”

Because, in the past it was considered to be economic quackery…used only by third world despots.

What’s changed in the prevailing years?

Our belief system in what constitutes “normal”.

We’ve become conditioned to the grotesque being portrayed as the “body beautiful”. And, that continually and relentlessly pumping up this freakish economic body, is somehow healthy for us.

Economic policy in the developed world has moved beyond quackery.

It’s now in the realm of the “evil scientist”…the central bankers know exactly what they’re doing to the economic body and continue to do so, regardless of the longer term consequences.’

Stay tuned tomorrow for what the ‘evil scientists’ have in store for us after the next (and far more severe) debt crisis hits.

If you thought the last decade was madness, then what awaits us is pure insanity.

Regards,

Vern Gowdie,
Editor, The Rum Rebellion

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


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 Port Phillip Publishing 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.


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