Former RBA Governor, Glenn Stevens made a statement on 1 December 2015 that tells you all need to know about the central banker mindset…
‘…monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending.’
Reward the borrower. Screw the saver.
And if you needed any further convincing, Treasurer Frydenberg’s latest plea to lenders should do it…
‘If responsible lending laws are applied too stringently, they will also negatively impact consumer behaviour…’
If banks — after being hauled over the coals by Commissioner Hayne — now act too responsibly, then that’s a negative for the economy.
I thought, in the long run, too much credit would have been far worse for the economy.
At least that’s what history teaches us. Silly me.
Our problem is we’ve had it so good for so long, we’ve completely lost our bearings.
Responsible lending is now a negative. Whereas, irresponsible lending is a positive.
How did this warped thinking become so mainstream?
In September 1989, our nation’s total debt was $772 billion. (On an inflation adjusted basis this would be $1,630 billion in today’s dollars.)
Source: Australian Debt Clock
Over the past three decades, there’s been a 10-fold increase in debt…the latest snapshot shows debt at $7,981 billion and climbing.
Source: Australian Debt Clock
Population growth only accounts for a fraction of this credit growth. In 1989, our population was just shy of 17 million. Today, it’s slightly over 25 million…a 50% increase.
When you do the inflation and population adjustments, the 1989 debt figure would be around $2,500 billion today.
Where did the other $5,481 billion come from?
A combination of lower interest rates and lower lending standards.
We’ve become hooked on growth. Population growth. Wage growth. Portfolio growth. Property growth. Economic growth. Profit growth.
All driven by…debt growth.
During the 1800s and early 1900s — when central banks did not exist — the economy went through waves of expansion and contraction. Breathing in and breathing out.
Continuous economic growth is a post-Second World War phenomena. The combination of higher birth rates, improved methods of transportation, better healthcare and credit growth, delivered one prosperous year after another.
Overseeing all this was the other 20th century invention…the central banker. Decade after decade of economic success bestowed a god-like status on the banker’s banker.
Raising the notion we should abolish the RBA, the Fed, the Bank of Japan, the ECB risks being labelled a ‘heretic’ by those who worship at the altar of central bankers.
Why do we need these false prophets to set interest rates?
To control the economy. What rubbish.
The economy would work just fine without these serial bubble-blowing institutions.
The legacy these economic geniuses have left us…
Millions and millions of people make decisions each day on the price of groceries, travel, hardware etc. If the price is right, we buy. If it is too high, we don’t.
Surely we can make the same judgement calls with interest rates?
Oh no, we can’t be trusted to make these decisions.
This is important business. Only those who have never left the cloistered world of academia can make these real world decisions. Economic theory from an exalted few is deemed to be more trustworthy than the decisions of everyday people who know how far a dollar can stretch.
For all their supposed wisdom, what’s the legacy these economic geniuses have left us…a system so bloated with debt it’s on the brink of collapse.
If it wasn’t on the verge, why else would they be implementing such radical and desperate measures?
The perpetual growth machine they’ve built is a giant Ponzi scheme. Relying on more and more debt to maintain the appearances of ‘growth’. They do this by lowering interest rates…as per Glenn Stevens’ remarks.
The continual injection of credit can make the numbers look good in the short term.
Heck, you can even have a world-record recession free run if enough people borrow enough money.
How much is enough?
In population and inflation adjusted terms, I reckon around $5,481 billion should do the trick.
But there’s always be a price to pay for being an ‘all show and no go’ economy. Japan paid it, so did Spain and Ireland.
The central bankers and politicians are trapped in a bind of their own making. They cannot confess to pursuing a seriously flawed model.
Imagine Dr Lowe(r) coming out and admitting the whole growth thing is a fraud.
‘Logically and mathematically it cannot be maintained without going deeper and deeper and deeper into debt. Therefore, the RBA Board has decided to hit the reset button and try to encourage a more equitable balance between savings and debt.’
How refreshing would that be?
But how likely?
There’s more chance of Hell experiencing a snowstorm. Then again with climate change…maybe even that’s possible.
Very few people ever question the continual growth premise.
Why? Because we’ve been so conditioned to think this is normal.
Conditioning plays a huge part in how we see the future. Three decades of inflation leads us to believe the next three decades will also produce inflation.
When in fact we could experience a sustained bout of deflation — similar to Japan’s experience over the past three decades.
Conditioning also heavily influences our investment decisions. Whatever the recent market performance has been (good or bad) we extrapolate this into the future.
Whereas a sustained market trend should be a signal to do the complete opposite.
Renae Richardson said: ‘It is our intellect and ability to reason that sets us apart from animals.’
However, when it comes to markets, our animal spirits renders Richardson’s observation redundant.
The human race has made enormous progress over the centuries due to our power to think and reason.
Yet in the world of investing, our primal instincts are never too far below the surface.
The herd mentality is why the average investor ends up being the average investor.
Successful investors continually question assumptions. They assess the risk more than the reward. They know if you first understand what you could lose, you will have a better appreciation of what you stand to gain. The herd operates on a ‘buy in haste and repent in leisure’ mentality.
Do not confuse intelligence with investing intellect. There are some very smart people who have done some very dumb things with money. A quick look at who invested with Bernie Madoff (the greatest con-artist of the century) confirms billionaires and bankers also fell victim to Madoff’s Ponzi scheme.
Madoff understood the power of investor conditioning. Year after year his ‘investment fund’ delivered investors a consistent 10% per annum return. Like performing seals, his investors were trained to expect a certain outcome.
We know there are only a few genuine certainties in life — death, taxes and night following day. All other ‘certainties’ should be subject to robust questioning and the more certain a certainty, the more it should be questioned. But why don’t people do this when it comes to investing their hard earned money?
Over a century ago, Russian physiologist, Ivan Pavlov conducted conditional reflex experiments with animals. The result of those experiments gave us the term ‘Pavlov’s Dog’.
Pavlov’s Dog is now synonymous with the actions of people who simply react to a situation rather than apply critical thinking.
That pretty much sums up the actions of the RBA Board.
Hyman Minsky, the Economics Nobel Laureate, noted ‘stability breeds instability’.
This was Minsky’s ironic way of describing complacency. The longer the good times last, the more convinced investors become that things will stay that way. Minsky found there was a direct correlation between the duration of the good times and rising levels of risk taking.
The unquestioned belief in the trend inevitably causes its demise. At the mature stage of the trend it’s common to hear phrases such as: ‘This time it is different’ and ‘You can’t go wrong buying…’ Complacency breeds contempt.
To further highlight the risks of conditioning and complacency, there is a brilliant turkey analogy in Nassim Taleb’s book, The Black Swan.
Leading up to Thanksgiving, the unsuspecting turkey is well fed day after day.
The turkey is being conditioned to think life is pretty good. The turkey’s confidence and belief system grows with each successive day of feeding. The turkey is certain it will be fed tomorrow. Then one day the turkey meets its true fate.
This graphic, from The Black Swan, is a great example of how you go from feasting to being the feast in one foul (pun intended) chop.
Source: The Black Swan
The chart of the turkey’s life bears a strong resemblance to any number of market graphs.
The Fed’s EZ money, Draghi’s ‘whatever it takes’ and Japan’s ‘Abenomics’, has conditioned market participants to believe they will continue to be fed by the central bankers.
Those who believe a handful of academics can permanently manipulate and artificially inflate markets are ‘turkeys’.
Markets, like nature, have a life force all of their own and man is no match for the fury of either. The axe awaits the turkeys that believe otherwise.
You must start thinking for yourself about the world the central bankers and politicians have created.
When the growth illusion is revealed for what it is…a giant con…it will be too late to take action.
The RBA’s role in perpetuating this lie is nothing short of disgraceful.
Millions of people are going to suffer because they actually believed these people knew what they were doing.
Nothing could be further from the truth.
The RBA has demonstrated beyond any doubt that it’s completely and utterly clueless when it comes to the responsible management of the economy.
Editor, The Rum Rebellion
PS: HOODWINKED! Why Australia’s ‘miracle’ economy is a farce. Check out my latest report to find out why.