With the RBA in Charge, We’re Screwed

Just when you think the RBA couldn’t get any more clueless, this less-than-August institution finds a way to plumb a new low…just like its interest rate policy.

In the Australian Financial Review on Tuesday, 10 September 2019, there was this gem from the RBA…

Pensioners may be complaining that low interest rates are squeezing returns on their savings, but the Reserve Bank of Australia says an ageing population is actually partly to blame for ultra-low interest rates.

And in the same breath, there was this admission from the RBA (emphasis added)…

The central bank also defended claims RBA rate cuts are hurting the economy because of lower returns to savers.

In aggregate, Australian households benefit from the effect of lower interest rates,” the RBA noted.

While the income of households with deposits is lower than if rates had not been reduced, the household sector as a whole has around twice as much debt as deposits.

Lower interest rates has nothing to do with an ageing population and everything to do with the household sectors debt load.

The reason rates are low (and going lower) is because there is twice as much debt in the system than there is savings.

The RBA loves borrowers and hates savers.

And, if the RBA (and its equally incompetent central bank counterparts) had their way, they’d be happy to see debt grow to three, four and even five times the level of savings.

More debt = more growth.

In the closeted world of central banks, no amount of debt is too much.

More needs to be even more and for good measure, let’s add some more again.

These economic numbskulls have created a system that’s totally and utterly dependent on debt and they either don’t get it or don’t know how to get out of it.

Irrespective of what their excuse is, they plough on regardless of the longer term consequences.

They doggedly pursue a policy that’s clearly well beyond its use-by date.

The debt-funded growth model worked well enough while people — in sufficient numbers — were young enough to take on more debt.

But people get older. They move into a different phase in the life cycle. That’s a known known…except to central bankers.

They’ve built a model that assumed everyone would keep borrowing forever and a day.

In their minds, all they had to do was keep make the cost of debt cheaper and cheaper and the model would keep ticking along.

And that did happen. Which was, in hindsight, a bad thing.

That only served to bestow upon them an air of superiority.

The conceit of these economic academics is evident in their ‘targeted’ inflation rate.

As if they, or anyone else, can mandate the level of erosion we should accept on our buying power.

They could get away with this act of arrogance while the model worked.

But now it’s broken.

So rather than accept that fact, no, let’s create a diversion. Blame it on people for getting older and not being interested in borrowing.

Enough people have reached that stage in life where savings are preferred over spending and/or borrowing.

No great surprise there. This demographic bubble has been in plain sight for decades.

Surely, these PhD geniuses factored this ageing dynamic into their debt-funded economic growth model?

Obviously not.

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These people have devoted their entire life to worshipping and advancing a flawed academic model.

If they blame the model, it means their entire life’s work has been a sham. Which, in due course, history will confirm was the case.

In the interim, they need a diversion. People getting older…that’ll do.

And you know what? In their central bank echo chamber, they probably convince each other that this nonsense is actually real.

How else can you explain their absolute bloody-mindedness to persist with a policy that has proven to be an abject failure?

Even Larry Sommers — a former US treasury secretary — acknowledged in a recent Op-Ed that there’s only one thing low interest rates have achieved…

From a macro perspective, low interest rates promote leverage and asset bubbles by reducing borrowing costs and discount factors, and encouraging investors to reach for yield.

Central banks are NOT the prudent economic managers they would like us to believe they are.

When it’s all distilled down to the basics, they’re nothing more than serial bubble blowers.

Tech bubble. US housing bubble.

And, boy-oh-boy they’ve blown the mother-of-all bubbles with the lowest interest rates in the history of money.

Wall Street is off the valuation charts. Aussie property prices are in nosebleed territory.

Junk bonds and barely investment grade corporate debt are only an economic slowdown away from vapourising hundreds of billions of dollars. Pension funds can’t earn a decent return to meet their obligations.

This bubble is a doozy.

All for what?

The illusion of growth.

Well, they’ve well and truly done it this time.

They’ve pushed the debt envelope to the point that it can’t be pushed anymore.

Even Larry Summers is imploring them to state the bleeding obviousCentral banks should admit they are impotent.

But don’t expect to hear that admission coming from the RBA any time soon.

There are two chances of central bankers confessing to having no lead left in their stimulus pencil.

Buckley’s and none.

Past success has sown the seeds of future failure

The Total Global Debt chart begins in 1999 at US$100 trillion.

Think about that.

It took hundreds of years to rack up US$100 trillion of debt.

Then, in less than 20 years, we add another US$150 trillion.

That’s the story of the central bankers’ secret for economic success…borrow our way to prosperity.

Central banks somehow believe it’s possible to continue adding to this gargantuan debt pile without severe disruption.

Talk about delusional. Our past success has sown our future failure.

Total Global Debt - 13-09-19

Source: Visual Capitalist

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The central banker strategy for economic success was a simple one.

Just keep taking interest rates in a southerly direction…all the way to zero and beyond if necessary.

The Rum Rebellion - 13-09-19

Source: Trading Economics

[Click to open in a new window]

Student loans. Payday lending. First, second and third mortgages. Corporate debt. Credit cards. Junk bonds. Sovereign debt. Buy now, pay later arrangements.

How the debt found its way into the economic body was largely irrelevant. All that mattered was that it did…and in ever increasing doses.

When you cut through all the jargon and economic mumbo-jumbo, the sole purpose of central banks is to keep society hooked on debt.

It’s all about lowering the cost of debt so people can ‘sniff, snort and inject’ whatever lines of credit they can get their hands on.

Central banks just keep pushing, pushing and pushing some more to pursue these economic highs.

But it’s not happening like it used to.

The latest quarterly report by Hoisington Investment Management (a US fixed interest specialist), gave this damning assessment on the effect negative rates have had on the Japanese and German economies (emphasis added)…

In the past five years, when nominal interest rates were slightly negative in Japan and Germany, real yields [after inflation] were even more negative since modest inflation continued. In each of these cases, negative real rates have been no panacea for the growth problems. Indeed, the span of sustained poor economic performance has increased.

We have tangible proof that negative rates DO NOT solve economic growth problems.

In fact, negative rates make a bad situation worse by eroding the profitability of the banking sector.

Why are low rates not the panacea central banks hoped they would be?

Because people (in sufficient numbers) either have enough debt to digest or for a variety of reasons (one of them being they’re getting older), are no longer as interested in debt.

What once worked, no longer works.

But that logic seems to escape central bankers.

They keep doing more and more of the same, hoping for a different outcome.

This insanity charades as sound economic management.

Based on all the available evidence, there is only one conclusion you can draw from all of this…with the RBA in charge, we’re screwed.

And when Australia sinks into a deep recession, who or what will the RBA blame for the mess?

Again, based on all available evidence, you can be pretty sure it won’t be pointing the finger at itself.


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.

The Rum Rebellion