Group Stink: Central Bankers Sheltered from the Real World

The year was 1970.

The movie…Patton. A biographical film about George Smith Patton Jr…a four-star US Army General in the Second World War.

The opening scene sees General Patton dressed in all his military finest walk on stage against the backdrop of a giant US flag.

Great theatrical staging.

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Patton’s inspiring address to the US Third Army begins with…

Now, I want you to remember that no bastard ever won a war by dying for his country. He won it by making the other poor dumb bastard die for his country.

Those two sentences of pure logic set the tone for the movie.

General George S Patton was portrayed as a tough, uncompromising, no nonsense leader.

Patton’s mere presence on the battlefield lifted the morale of his troops.

His blunt and abrasive style didn’t always win him friends…but did earn him (begrudging) respect.

Patton was a man who did not suffer fools.

The audiences loved it.

Patton scooped the 43rd Academy Awards…winning seven Oscars…including George C Scott as the Best Actor.

Our sixth grade class watched Patton at a cinema in Brisbane’s Fortitude Valley. Patton’s toughness, determination and common sense approach was an inspiration to a group of impressionable 11-year-old boys.

The theatre is long gone, but the memory remains. Patton still rates as one of my all-time favourite movies.

One of General Patton’s more quotable quotes is…

If everyone is thinking alike, then somebody isn’t thinking’.

In these times of ‘wokeness’ and ‘virtue signalling’, Patton would have been the squarest of pegs in the roundest of holes.

Playing the go along to get along game was definitely not the General’s style.

Holding people accountable, questioning their reasoning and calling out incompetence can be a real career killer.

These character traits would have disqualified General Patton from a post-military career as a central banker.

Without a PhD in group think, don’t even bother applying for a position in the cossetted world of central bankers.

Central bankers are more Peter Pan than Patton. They never want to grow up and leave school.

Working in central bank Neverland offers them safe shelter from the real world.

They can hypothesise all day long with fellow Peter Panners…playing with their (flawed) models and dreaming of a world of where there’s endless GDP growth; not-too-low inflation; wages growth; the abolition of business cycles…‘oh what nirvana it will be’ they say in lilted voices to their Tinkerbells.

A career in Neverland has a number of advantages…

  • you are ‘never’  held accountable when your theories fail spectacularly in practice;
  • you’ll never have to worry about a job after leaving Neverland because you’ll be given a cushy job in some left-wing group-think tank;
  • and, thanks to your taxpayer funded pension, you’ll never have to bother with earning a decent risk-free return on your capital to fund a dignified retirement.

Imagine what would happen if someone (possessing a bulls**t detector) like Patton, should ever be allowed into central bank Neverland?

Stress leave claims would go through the roof.

Where do you go if you want one of these PhDs in group think?

Massachusetts Institute of Technology (MIT) seems to be a breeding ground for all budding Peter Panners.

The MIT alumni include…

  • Former US Federal Reserve chairman Ben Bernanke…he of ‘subprime is contained’ infamy.
  • Current European Central Bank President, Mario Draghi…‘whatever it takes’.
  • Former Bank of Israel governor and former International Monetary Fund chief economist and vice-president Stanley Fischer.
  • Current RBA Governor, Dr Phil Lowe
  • Current Deputy RBA Governor, Guy Debelle

Nobel Prize winner, Robert Solow — an MIT professor since 1949 and now, an Emeritus Institute Professor of Economics at MIT — was reported in the Sydney Morning Herald as saying MIT’s speciality…‘has been not just to develop theories, but ”have a grasp of what was actually happening”’.

Professor Solow statement is one of good intent…balancing theory with a grasp of what was actually happening.

But, as they say, the road to hell is paved with good intentions.

And, when it comes to central banks, they’re absolutely, 110% committed to taking us on that highway to Hades.

The only thing today’s central bankers have a firm grasp on is their tools…policy tools that is.

And what an abject failure these tools have been.

But the Peter Panners remain completely blind to the mess they have created.

The following is an extract from the 5 August 2019 edition of the Wall Street Journal.

The article was titled ‘America Needs An Independent Fed’, written by Paul Volcker, Alan Greenspan, Ben Bernanke and Janet Yellen.

I’m somewhat surprised Volcker put his name to this article. His legacy is one to be proud of…whereas the other three amigos…well, you be the judge.

Here’s an extract from the article…

As former chairs of the board of governors of the Federal Reserve System, we are united in the conviction that the Fed and its chair must be permitted to act independently and in the best interests of the economy, free of short-term political pressures and, in particular, without the threat of removal or demotion of Fed leaders for political reasons.

Collectively, we served our nation across nearly 40 years and were appointed and reappointed by six presidents, both Republican and Democratic. Each of us had to make difficult decisions to help guide the economy toward the Fed’s legislated goals of maximum employment and stable prices.

Here’s a quick look at the legacy of the three amigos.

The difficult decisions…lowering rates.

Must have been tough taking rates from the 20% range to the zero-bound level…and receiving all those accolades from Wall Street, financiers and borrowers.

FRED - Effective Federal Funds Rate - 15-08-19

Source: Federal Reserve Economic Data

[Click to open in a new window]

Give me a break.

Paul Volcker (the three Amigos predecessor) was the one who took the really difficult decisions. Volcker raised rates from 5% to 20% (in the face of enormous political pressure) to crack inflation.

Volcker paved the way for his successors to embark on a ‘low rate, high debt’ growth policy…and oh what a success that’s been.

Total US debt (from all sectors) has risen from US$4.4 trillion in 1980 to US$72 trillion…an almost 18-fold increase.

FRED - All sectors; debt securities and loans; liability, level - 15-08-19

Source: Federal Reserve Economic Data

[Click to open in a new window]

What impact did all this debt have on the economy?

In 1980, US GDP was US$2.8 trillion.

Today, it’s a touch over US$20 trillion

FRED - Gross DOmestic Product - 15-08-19

Source: Federal Reserve Economic Data

[Click to open in a new window]

The three amigos point to the seven-fold increase in GDP as evidence of their sound economic stewardship.

What they conveniently airbrush out of the picture is the additional US$68 trillion of debt it took to achieve this economic ‘growth’…US$4 of debt for US$1 of GDP. What a disgrace.

Difficult decisions…my a*se.

The three amigos were serial opportunists. Taking advantage of the enormous buffer in interest rates they inherited from Volcker…lowering them to the point where they could lower them no more.

If they genuinely had the best interests of the economy at heart, they would have taken the real tough decisions…

  • holding interest rates higher
  • working behind the scenes to hold banks accountable to higher lending standards
  • allowing markets to function on a true price discovery mechanism
  • allowing recessions to clean out the dead wood
  • accepting a lower growth rate as the trade-off for the longer-term stability of the system

But that was a bit too much to ask of the three ‘group thinkers’.

There would be no fawning left-wing media or cosy post-Neverland positions awaiting them.

Not one of the three Amigos exercised individual thought…even after the market showed them — in 2000/01 and 2008/08 — the serious error of their policy ways.

What was that Einstein said about insanity?

Something along the lines of doing the same thing over and over again and expecting a different outcome.

Not all that different really to the privileged, upper class British officers who sent wave after wave of foot soldiers to their death at Gallipoli.

These incompetent military theorists remained oblivious to…‘the cries of the wounded and seeing corpses rotting in the glare of the sun.

Contrast that with how history remembers the independent, practical thinking and forthright General George S Patton…

Historians generally agree that Patton was not only one of the greatest military leaders that the United States has ever produced but also one of the most complex and contradictory. Patton believed that it was critical for a general to stand out and to be seen by his troops…

Patton’s practical experience and abrasive personality may not have won him friends in high places, but it did win him (and his troops) decisive victories where it mattered.

Unfortunately, our central bankers are gutless wonders when it comes to the economic battlefield.

They hide behind their theories and keep sending the savers of the world to a certain financial death…even though the overwhelming evidence shows that low and negative rates will not deliver them the victory they so desperately covet.

Group think is the embodiment of insanity.

Stay tuned tomorrow for more on group think in the RBA.


Vern Gowdie,
Editor, The Rum Rebellion

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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.

The Rum Rebellion