Times They are a Changin’ – Part 1: Expecting Economic Growth Rates of the Past

In 1964 Bob Dylan gave us the timeless classic ‘The times they are a-changin’.

Come gather ‘round, people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You’ll be drenched to the bone
If your time to you is worth savin’
And you better start swimmin’
Or you’ll sink like a stone
For the times they are a-changin

Recognising the changing tides of time has never been more crucial than it is today.

Seeing over the horizon requires a lot of time, effort, information and thought. The hustle and bustle of day-to-day life doesn’t afford most people the luxury to contemplate the influences of long-term trends on their lives.

They just get up and deal with the situation in front of them. The daily commute. Children. Mortgage payments. Work. Catching up on social media.

Which is why we (as in society in general) fall into the trap of projecting the past into the future. But it’s never as easy as that.

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For example, in the late 1980s, I distinctly remember the Queensland Government dangling the retirement carrot to any employee over 55. It was a good time to be a financial planner.

How times change.

On Tuesday the Sydney Morning Herald reported (emphasis is mine):

Treasurer Josh Frydenberg will on Tuesday signal a drive to get people in their mid and late 60s to work longer and undertake training to keep in touch with the jobs market as the government confronts long-term pressures to the budget bottom line.’

For anyone who took the time to look at our nation’s demographics, this change was telegraphed a long time ago.

Lower birth rates combined with longer life expectancies meant the generations in the middle would eventually be squeezed.

Appreciating what’s shifting the tides of our times, can hopefully help us from sinking like a stone.

All our expectations — share market performance, property values, economic growth, wage increases, retirement incomes, age pension funding — have been created from an era that’s without historical precedent.

The 20th century was the purplest of purple patches. It was without historical peer. It’s extremely unlikely we’ll see a repeat of this period in the 21st century.

And the evidence to date — sluggish GDP growth; wage suppression; persistently low inflation; ultra-low interest rates — indicates this to be true.

The combination of mechanisation; sanitation; medication; population; financialisation and state-sanctioned inflation made the 20th century an unrivalled era of prosperity.

The legacy of this remarkable period is an ageing population; a mountain of debt; trillions in unfunded entitlement promises; a competitive global labour force (willing to offer their services for a much lower rate of pay) and the coming age of automation.

Expecting the economic growth rates of the past to be reproduced over the coming decades is, in my opinion, a very grave error.

If I’m correct, we can expect to see many retirement dreams being washed away by the tidal wave of change coming our way.

To understand why the future is unlikely to be anything like the past, I’d like to share with you an edited extract from the May 2017 The Gowdie Letter.

The points made then are just as, if not, more so relevant today.

This is part one of a two-part series.

An investment in knowledge pays the best interest’

Benjamin Franklin.

My desire to understand long-term cycles, valuations and investor psychology motivates me to research economic and market history.

Which brings us to the biggest cycle in recent history…the 20th century.

Mechanisation. Sanitation. Medication. These three factors all contributed to a period of extraordinary human progress.

To appreciate the prosperity created during the 20th century, it is important to note this golden rule:

Economic growth can only come from two sources — an increasing workforce and/or increasing productivity. Please remember the rule as we go through the charts.

In 1917, global population was estimated to be 1.9 billion. That number today is close to 7.5 billion.

Think about that…it took thousands of years to reach 2 billion and in the space of 100 years we add another 5.5 billion. That’s a significant increase in workers and consumers.

Global Population Growth Rates 22-11-19

Source: Economica

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Over the next 100 years, UN data projects the global population will be over 11 billion…another 4 billion people.

Two points to consider here.

Firstly, the rate of population growth is slowing. The population nearly quadrupled over the past century and will only rise by 50% in the next century.

 Secondly, can the world supply sufficient water, food and resources to 11.2 billion people?

Scientific research suggests around 9, possibly 10, billion people is all our Earth can adequately support. Perhaps, biotechnology can provide solutions to the food and water constraints.

Either way, global population growth is slowing in quantitative terms.

In qualitative terms, it’s a different story.

When you excluded Africa’s projected population growth from the above chart, it appears the developed and developing worlds have, at best, reached ‘peak population’.

In Africa, there’s too much poverty, for too many people to make a significant difference to global consumption. It’ll take generations before any appreciable gains to impact the global economy. Today’s investors do not have the luxury of waiting generations.

The Rum Rebellion 22-11-19

Source: Economica

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Using the UN’s medium variant (red line) sees population flatlining in the decades ahead.

The low variant (green line) has us on a trajectory for declining population numbers.

Remember the golden rule for economic growth.

Increase workforce and/or increase productivity.

Strike one on the first component of growth.

Anyway, back to the 20th century.

The beauty of long-term trends is you can stand back and appreciate the broader landscape.

This next chart is a graphic of the interplay between demographics, interest rates, debt levels and GDP growth over the past 65 years.

The blue (and, red) bars represent the annual increase/decrease in 15-64 year olds in the major economies. This cohort is considered the ‘productive’ contribution to the global economy.

The black line is the Federal Funds Rate (FFR) — the US cash rate.

That exponential red line is global debt.

The green line is global GDP.

Global Economic Growth Rates Past 22-11-19

Source: Economica

[Click to open in a new window]

From 1951 to 1981, the industrial world largely prospered from the ‘golden rule’.

Workforce increased.

Productive output grew thanks to mechanisation.

The intertwining of the red and green lines, meant a dollar of debt produced a dollar of growth.

It’s little wonder that nostalgic voters want to return to that period of shared prosperity.

After 1981, the global workforce continued to increase. However, the West no longer had it on its own. The increased workforce was also occurring in countries that could provide lower cost labour. China, under Deng Xiaoping, began to reform its economy in the late 1970s.

Productivity gains had succumbed to the law of diminishing returns.

Making machines faster only delivered marginal gains in output.

Slowly but surely, the ‘prosperous’ West resorted to financing their lifestyles with debt.

Consumption increased. The East was the ‘maker’ and the West was the ‘taker’.

Thanks to the East exporting its low labour cost to the West, inflation was on a downward trend.

Lower inflation resulted in lower interest rates. Lower interest rates fed into more borrowings. A virtuous cycle of debt and consumption in the West led to manufacturing growth in the East.

The world — West and East — became hooked on debt for growth.

This dependency has reached an unhealthy and destructive level.

The addicted economy now needs more than four dollars of debt to get a dollar’s worth of GDP ‘buzz’.

The legacy of the 20th century is — too much debt; too many government promises; too little future growth.

Where to from here?

The components that provided the initial propulsion for the 20th century’s economic growth model were…

Low debt levels. High birth rates and lower life expectancies. Minimal welfare support.

Productivity gains from the introduction of production plants, machinery and technology.

A one-off boost to ‘the productive sector’ when women (in large numbers) entered the workforce.

These factors are no longer in existence.

Stay tuned for next week when we look at why those projections of the Dow going to 100,000 or 500,000 points are seriously flawed.


Vern Gowdie,
Editor, The Rum Rebellion

PS: Find out why Australia’s ‘miracle’ economy is a farce. 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 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