The Symptom Central Banks Fear: Failure of Perpetual Economic Growth

The best-laid plans of mice and men often go awry

Robert Burns

What happens when plans go awry?

The answer to that depends on the plans and the planner.

The romantic picnic you’ve planned down to the last detail, could be derailed by bad weather.

Plan B is to relocate to your favourite restaurant. Not the setting you had in mind. But, in the scheme of things, it’s no big deal.

However, the grander the plan, the greater the potential for disappointment.

What if your plan was to create a perpetual economic growth machine? What happens if that plan worked a treat for decades and then goes awry?

A plan that is so grand requires several key elements.

You need an institution to regulate the flow of money through the system. Tick. US Federal Reserve Bank established in 1913.

WARNING: Here’s two reasons why the AUD could collapse in 2020

You need to paint a vision as to why people need to borrow today, instead of saving and buying tomorrow. Tick.

In 1931, The American Dream entered public consciousness. The Dream would introduce the phrase ‘keeping up with the Joneses’ into our conversations. Neighbourly competition helped the consumption mentality to take hold.

You need an expanding base of consumers. Tick. Post Second World War baby boom.

You need inflation to artificially boost wages and reduce the real value of debt. Tick.

Since the US Federal Reserve was legislated into existence (by bankers in cahoots with politicians) inflation has been on an exponential curve.

The Rum Rebellion 08-11-19

Source: Visualizing Economics

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You need more wage earners spending more money. Tick. In the 1970’s, married women enter the workforce. More money for households to spend.

You need banks to be less conservative…loosen up lending standards. Tick.

Banking de-regulation in the 1980’s fired the starting gun in the race to the bottom in credit quality.

You need asset price growth to keep younger generations believing in the Dream. Tick.

Record high share markets. Record high property prices.

You need to be able to manipulate the outcomes. Tick. Control of interest rate settings.

Control of the money-printing machine’s ‘on/off’ switch.

There’s a lot of moving parts in this grand plan…and that’s just on the macro level.

On a micro level, every day people are making every day decisions about how much or how little they buy into (or, more to the point, borrowed to buy into) the Dream.

However, on balance — in spite of some temporary periods of disruption — the plan has, I suspect, exceeded the founding planners’ dreams.

Our Addiction to Economic Growth…

We have become conditioned to growth. We expect growth. Anything less and the chorus of ‘stimulus, debt and deficits’ is shouted from the rooftops.

Prior to the Fed’s establishment in 1913, the economy was left to its own devices.

Market forces provided the checks and balances to society’s grand plans. Bouts of inflation and deflation cancelled each other out. A dollar in 1800, pretty much had the same value in 1900.

The 19th century was a period when growth was hoped for, but not expected.

The financial and social engineering of the 20th century changed all that.

A century of unprecedented growth has spoilt us beyond belief. But we don’t know that.

Why?

Because year after year, decade after decade it’s just crept up on us. We had this level of increase last year so we want the same (or more) next year.

It’s the classic ‘boil the frog’ syndrome…except that this frog has been in the pot for a very, very long time.

In comparison with today’s ‘Dream’, the Great Depression generation’s version of the ‘Dream’ was far more modest

That frugal generation had no expectation of:

  • Owning a fully decorated McMansion…with a pool.
  • Having a job with a multitude of ‘leave’ entitlements…sick, annual, parental, stress…to name a few.
  • A corporate pension plan.
  • Receiving an age pension for three decades.
  • Access to first class healthcare at little or no cost.
  • Overseas travel, dinners out, café culture, designer labels.

Today’s Dream is much more expansive and far more expensive than it used to be.

That’s why rates have gone down and debt levels have gone up. Keeping the Dream alive is becoming a very costly exercise.

However, the strain of ‘keeping up with Joneses’ is starting to show.

The Sydney Morning Herald on 28 October 2019:

The Rum Rebellion 08-11-19

Source: The Sydney Morning Herald

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As reported (emphasis is mine):

The National Working Families Report found two thirds of working parents were struggling to care for their physical and mental health due to the tension between work and caring and one in four were thinking about quitting or “actively intending to” leave their job because of it.

The survey of 6289 parents in the professions, science and technical services, health care, education, training and IT found that although work is fulfilling and people feel satisfied by it, one third report the work-family juggle is putting “stress and tension” on their relationships with partners and children.

Have we reached the point where households are beginning to re-evaluate their priorities?

Perhaps the price of the Dream has reached a level where people are no longer prepared to pay?

If that’s the case, then what effect does that have on the grand plan of perpetual economic growth?

The plan could be at risk of going horribly awry.

These doubts and recalibrating of priorities are being expressed BEFORE the global economy suffers it’s next (and more punishing) recession.

What happens when house prices tumble, unemployment levels rise, retirement accounts are savaged and all the Fed’s men and all the Fed’s horses can’t put the economy back together again?

And that is the central bankers greatest fear…society (in sufficient numbers) gives up on the Dream.

What happens then?

This has been the topic of discussion in a four part series for The Gowdie Letter.

The series was titled ‘Shattered Dreams. Social Strain’.

The bottom line is we can expect to hear the word ‘unconventional’ bandied around a lot in the coming years.

And what today is considered unconventional will become conventional. Which means there will be even crazier and more ridiculous plans being dreamt up.

And believe me, those plans will go awry in so many unintended ways.

Best guess is we’ll see deflation first. Good news for those who still have cash. Their buying power will be enhanced. And then inflation. Probably a lot of inflation. Bad news for those who didn’t switch out of cash into hard assets.

For those who have neatly prepared financial plans showing lineal progress of your capital, you can be assured that plan will definitely go awry when the next market crash hits.

My advice is, plan for the worst and hope like hell for the best.

Regards,


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Vern Gowdie,
Editor, The Rum Rebellion

PS: EXPOSED – The truth behind Australia’s ‘miracle’ economy. 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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