The Joke That’s No Laughing Matter: Credit Fuelled Economic Growth

The ECB’s decision to move rates further into the negative has Donald all in a lather.

Donald J. Trump Tweet - 19-09-19

Source: Twitter

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This is just another salvo in the currency skirmish that’s playing out between China, Europe and Uncle Sam.

Australia cannot afford to have our currency strengthen in a world of weakening demand. Which is why the RBA will take our interest rates much lower.

Free report: Aussie dollar crunch coming (find out why)

With global growth slowing, wages stagnating and even more desperate actions by central bankers, this could mean we’re nearing the end of the greatest fraud in history.

Deflation is coming and our economic engine only runs on high octane inflation.

The game of continually bringing forward future consumption (by borrowing today and repaying tomorrow) is fast reaching its use by date.

All scams eventually come to an end…some just last much longer than others.

The Fitzgerald Inquiry — officially titled ‘The Commission of Inquiry into Possible Illegal Activities and Associated Police Misconduct’ — was formally sanctioned in 1987 after police and political corruption in Queensland had, after so many decades, become so blatantly obvious.

Matthew Condon’s trilogy of books The Three Crooked Kings, Jacks and Jokers and All Fall Down  give an excellent account of this sordid period of police corruption in Queensland.

The story of police corruption starts back in the 1940s when police protection was afforded — for a price — to SP bookmakers and prostitution.

It all started out with a few dollars here and there. But as usual, people get greedy.

The nickname ‘The Joke’ was given to the collection and distribution of police graft. The longer the Joke went on, the more brazen the corrupt coppers became. Complacency breeds contempt.

The tentacles of corruption spread beyond the bookies and the ladies of the night to include hard drugs and illicit gambling. Millions of dollars in dirty money were being paid annually to the bent boys in blue.

The corruption went on for decades. Over the years, decent coppers tried to expose the corruption. But to no avail. Their careers were crushed by the forces of evil. Others, outside the police force, who tried to expose the fraud ended up as unsolved murder cases or imprisoned on trumped-up charges.

The grand finale to this whole sorry saga was the appointment of one of the corrupt ringleaders, Terry Lewis, to the position of Police Commissioner.

In the end, Lewis was stripped of his knighthood (shows you what one of those titles is worth if someone of Lewis’s calibre can buy one) and he spent more than a decade in jail.

The Fitzgerald Inquiry also resulted in three former Government Ministers being jailed and nearly saw former Premier the late Sir Joh Bjelke-Petersen join them in a matching set of striped pyjamas.

A number of corrupt police officers turned state evidence for immunity from prosecution. Gutless wonders.

After reading the books I couldn’t help but think of the correlation between the corruption in Queensland over the decades and the joke being played out on the global economy and financial markets since the 1970s.

The Joke of Credit Fuelled Economic Growth:

It all started out ‘innocently’ enough with the abolition of the gold standard.

The period of credit expansion did not begin in earnest until after the 1980s, when interest rates began to descend from their near 20% highs and baby boomers started to hit their peak consumption years.

The deregulation of the banking sector in the 1980s resulted in a relaxation of lending standards. All forms of credit started to be peddled to consumers and businesses.

Technology and globalisation (manufacturing bases being moved to low cost Asian countries) kept a lid on inflation which in turn maintained downward pressure on interest rates.

The lower interest rates went, the higher debt levels rose — 10% on $100,000 or 2% on $500,000 the end result was a $10,000 interest cost.

Everyone was addicted to this credit fuelled economic growth model. Everything went up. Wages. House values. Share markets. Entitlement payments.

There were those who questioned the sustainability of this model. But they were in the minority and easily drowned out.

The longer the model kept delivering on the upside, the more discredited the voices of the naysayers became.

An army of PhD Keynesian economists were employed to spread the message of ‘the more the merrier’. Not enough growth? Print, borrow and spend more. Simple.

Easy money was on offer and we took it without really thinking about the consequences of our actions.

The subprime debacle should have heralded in a Fitzgerald-type Inquiry into the actions of Central Bankers and their role in perpetrating this growth fraud on the global economy.

But far too many senior officers were in on the joke — Wall Street CEOs, politicians of all stripes, bank executives and senior bureaucrats.

There was no way they wanted a spotlight shone on their activities…they had way too much to lose.

Instead, the bagmen on Wall Street were bailed out. Greater quantities of even cheaper money were released into the economy by every major central bank.

The Chinese really embraced the joke. Increasing their debt levels five-fold over the past decade…from US$7 trillion to over US$35 trillion.

The ‘everything’ bubble keeps being inflated and this cleverly diverted attention from the joke.

But this joke is not funny. It has serious repercussions for anyone living in a modern society.

The smoke and mirrors stimulus of the past decade is starting to be questioned by those in authority.

As reported by Bloomberg on 13 September 2019 (emphasis is mine)…

Austria’s new central-bank governor said that the European Central Bank’s latest easing package was possibly a mistake and can be changed after incoming President Christine Lagarde takes over from Mario Draghi.

Speaking out in tandem with Holzmann was Dutch governor Klaas Knot. In an unusual statement on Friday, he called the decision to launch the stimulus that includes a new bond-buying program disproportionate to economic conditions, adding that there are “sound reasons to doubt its effectiveness”. He also pointed to increasing signs of scarcity of low-risk assets and excessive risk-taking in the housing market.

As more countries go deeper into negative interest rate territory, the more people start to question what was previously unquestionable…‘is this model sustainable?’.

National media scrutiny on Queensland corruption in the late 1980s resulted in the whole house of cards falling down.

With regards to the joke being played on the global economy and financial markets, it’ll be the reverse.

The whole house of cards will fall down first and then media scrutiny will see the likes of Powell, Lowe, Lagarde, Draghi et al hauled before Senate and Congressional inquiries to explain their actions.

As with the Fitzgerald Inquiry only a token few will be sacrificed to appease the crowd. The rest will skulk off somewhere and be looked after.

As for the crowd, well, the joke is upon us.

The joke provided plenty of good and profitable times while it lasted. However, as the joke unravels, it’ll have devastating consequences destined to reverberate for decades to come.

This joke is no laughing matter.

Regards

Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

PS: Is the Australian economy in danger of a Japanese-like economic winter? Download your free report 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 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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