An Age of Discontent: Central Bankers Know the Winter Chill is Coming

In 1594, Shakespeare penned the play Richard III.

The opening line, delivered by Richard, is the classic…

Now is the winter of our discontent’.

In 16th Century England, winters were pretty bleak and depressive periods…some would say they still are.

Shakespeare cleverly used seasons as a metaphor for emotional states.

The second line tell us that a mood change is afoot…

Made glorious summer by this sun of York’.

With the re-accession to the throne of Richard’s brother, brighter, more prosperous times beckoned for Richard’s noble family.

It was a far different story for the peasant class in Medieval England.

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There were no Machiavellian plots to be hatched or lands to be raided or titles to be gained.

One day looked much like the other.

Tilling the field. Working the anvil. Milling the grain.

For the peasant class, life was one long ‘winter of discontent’.

When Shakespeare wrote Richard III, the UK economy (in 2013 inflation adjusted terms) had stagnated for more than two centuries.

The following chart shows there was a significant jump in per capita output in 1350 — from £800 to £1,100.

However, this wasn’t due to any great innovation or brilliant economic strategy.

The Plague wiped out nearly half the population.

Those who survived enjoyed a larger slice of the economic pie…then the economy resumed its range bound pattern.

GDP growth per capita in England since 1270 - 29-08-19

Source: Our World in Data

[Click to open in a new window]

With century after century of no real progress, the average 16th Century worker could have been excused for thinking ‘same s**t, different day’.

Plow the same field. Pound the same hammer. Grind the same mill stone.

Just like my father and his father and the generations before that did.

It’s only a guess, but I think GDP growth and targeted inflation were unlikely to be topics of conversation.

Based on the 300-year trend of stagnating growth (from 1300–1600), what do you think a medieval economist would have been forecasting for the decades and centuries ahead?

A significant lift in growth or a projection of the past into the future?

My money is on the latter…more of the same.

But as we know, change was coming. New dynamics were being introduced into society.

Steam power. Industrialisation. Electricity. Sanitisation. Modern medicine.

These factors combined to lift productivity levels and life expectancy rates.

Over the course of the next two centuries (1600–1800), GDP per capita doubled.

And folks, that was just the beginning.

The improvements continued.

Output per capita doubled again from 1800–1900.

We were on a roll.

Then came the 20th Century…a glorious summer like no other.

GDP Per capita increased six-fold.

GDP growth per capita in England since 1270 - 29-08-19

Source: Our World in Data

[Click to open in a new window]

While the charts are based on the UK economy, the ‘sun of York’ was high in the sky…radiating its warmth on the entire Western World.

The reason for going back in time is to provide some perspective on the growth we assume is our birthright.

This Kind of GDP Growth is Not Normal

When viewed through the looking glass of history, growth on the scale we’ve experienced in our lifetimes is not normal.

The parabolic rise in per capita GDP (especially after 1950) was a direct result of some very powerful drivers.

Population. Innovation. Financialisation.

The Size of the world population over the last 12.000 years - 29-08-19

Source: Our World in Data

[Click to open in a new window]

More people. More creativity in more fields of endeavour. More debt.

That’s the short story of the 20th Century.

The convergence of these factors has given us a world that’s light years removed from even a century ago…let alone medieval times.

We’ve become conditioned (and addicted) to growth.

Without it, we get ourselves all in a lather.

Wages stagnate for a couple of years and it becomes a near-national-emergency.

Lacklustre GDP and inflation numbers has central bankers, politicians and business leaders in varying states of anxiety and flux.

We must do something, anything to boost growth.

Can’t they see that this was an extraordinary period in history, one that can never be repeated?

Nope. They want the endless summer. While this notion has great appeal, it’s not realistic.

Seasons change.

The principle of declining marginal utility is at play on all fronts.

Population growth has plateaued in the developed and developing world.

Women cannot re-enter the workforce for a second time.

Productivity gains from innovation are much harder to come by…and any future innovation is going to cost tens of millions of jobs.

A falling ratio of taxpayers to age pensioners.

Household, corporate and public sector balance sheets are loaded up with debt.

It’s simply not feasible to replicate the conditions that delivered the exceptional 20th Century growth levels.

The global economy is no longer the teenager of the 1950s. One that was bounding with youthful optimism.

After 70 years of ‘growth’, the global economy just doesn’t have the same spring in its step.

It is older. It is tired. It is not as interested in borrowing.

How do I know that?

Because the economy is merely a reflection of the people who contribute to it.

The baby boomers — the major drivers of the post-1950 growth — are in another stage of life. Younger generations are picking up the economic mantle, but their starting point is totally different to the boomers.

Student debts. Sky-high property prices. Career uncertainty. No hurry to go down the aisle. Even less hurry to have children.

Global growth has slowed because the dynamics have changed.

The central bankers know the winter chill is coming, but they’re pulling out all stops to prevent the sun from setting.

Vitor Constâncio, the former vice president of the European Central Bank, was recently interviewed by Spiegel online.

When questioned on the need for negative interest rates, he said…

All this is the result of a phenomenon that economists call secular stagnation: In the developed economies, there is a lack of aggregate demand — or, in other words, a surplus of savings over planned investment.

Are people saving too much and not spending? Constâncio’s reply…

Yes. There are mainly demographic reasons for this: People are getting older and saving more. In addition, there has been a greater risk aversion among investors since the financial crisis. That’s why they are all looking for safe investments.

There you have it. They know conditions have changed. But refuse to accept it.

Central banks are actively pursuing policies to dissuade people from acting responsibility.

Savings and conservative investing. These were the very foundations upon which the extraordinary period of 20th Century growth was built.

The obsession with growth has crossed over into the absurd.

The central banks desperate actions remind me of Jocelyn Wildenstein’s (the New York socialite) fixation with trying to retain her youthful looks…

Jocelyn Wildenstein fixation


[Click to open in a new window]

The end result being a grotesque disfiguration of its original form.

Instead of allowing the global economy to mature into a phase of slower and lower growth, central bankers remain resolute in their commitment to constantly meddle.

The economy is being subjected to all sorts of invasive (and more dangerous) procedures.

Going further into the sub-zero interest rate vortex.

Greater amounts of QE to plump up asset prices.

Financing Government spending with printed dollars.

Helicopter money being dropped to all and sundry to buy more useless stuff.

Like the work done on Jocelyn Wildenstein, these desperate attempts to revive our glory days are going to produce a very ugly result.

In preparation for the inevitable change in seasons, it’s worth recalling another of Shakespeare’s famous lines…

Neither a borrower nor a lender be…

(Hamlet Act 1, Scene 3)

Those who’ve borrowed heavily to invest and/or lent money (via corporate bonds of dubious credit quality) are destined to suffer not just a winter, but an age of discontent.


Vern Gowdie Signature

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.

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