What We Know from 20th Century History

Dear Reader,

The decade passed has, from a financial perspective, truly been one for the ages.

In 2010 we had no concept of the trillions and trillions of dollars that needed to be printed to avert a disaster that was triggered by a mere US$400 billion subprime meltdown.

The idea of negative interest rates was completely foreign. The mere mention of it would have invited an ‘are you nuts?’ response.

Modern Monetary Theory — the printing of money to finance government spending — was once in the realms of quackery.

Who would have thought a decade ago — when our interest rates were around 5% — the RBA would take us to 0.75% AND start talking about UNconventional monetary policy?

In the space of 10 years, what was once considered economic voodoo has been transformed into mainstream thinking.

In the midst of the last decade I wrote a book titled The End of Australia.

The book was written from an ‘outside looking in’ perspective.

My upbringing in a working class family taught me certain values. Never spend what you don’t have.

Look after the pennies and the pounds will look after themselves. There’s no new way to go broke. It’s always from having too much debt.

It was good old homespun, common sense money management.

As I saw it in 2015, Australia was so far removed from the value system I grew up with, that it was almost unrecognisable.

We were bingeing on debt. The RBA encouraged it. The banks reveled in it. The households couldn’t get enough of it. And, the politicians loved it…growth, growth and more growth.

Couldn’t they see that this was not a sustainable economic model?

Did the lessons from history — The Great Depression; Japan’s broken economy; the 2008/09 crisis — not resonate?

Is the Australian economy in danger of a Japanese-like economic winter?

In 2015, it was obvious to me that we were on an unsustainable trajectory.

Little did I realise at the time how long the unsustainable could be sustained.

However, nothing in the general premise has changed…we are headed for a debt crisis.

However, there has been one significant change in the detail. The debt crisis is going to be worse than originally expected.

Why?

The debt pile is that much bigger.

And if there’s any truth in ‘the higher you go, the harder you fall’, then logically you must expect a greater thud on impact.

The 2020s will be nothing like the 2010s

In recent weeks I’ve been updating The End of Australia. The following is an extract from the revised Introduction…

Back in 2015, Australia’s total debt — public, private and corporate — was estimated to be $5.7 trillion.


Money Morning

Source: Australian Debt Clock

[Click to open in a new window]

Since then, our nation’s collective debt has increased to almost $8.2 trillion…a 44% increase in just over four years.

What’s the extra $2.5 trillion of debt bought us in economic terms?

In 2015, our GDP was $1.6 trillion. The latest data from the ABS has our economy sitting just shy of $1.9 trillion.

It’s taken $2,500 billion of debt to produce $300 billion of economic output.

That’s a ratio of $8 of debt to $1 of GDP.

What a disgrace.

And the blame for this sad state of affairs lies fairly and squarely at the feet of the RBA.

Our central bank’s obsession with meeting growth and inflation targets has blinded it to the realities of the bigger picture.

Even if you drop rates to zero, a system can handle only so much debt.

Why?

Principal payments still have to be made.

And the more you borrow, the greater the amount needed — from a stagnating wage — to meet that capital repayment.

Eventually, households reach the point where they can borrow no more.

Then this stupid/ridiculous/harebrained/irresponsible debt-funded economic growth model goes belly-up.

If the RBA and other central banks think this ‘policy’ can continue indefinitely, they are seriously misguided.

Our so-called economic strength is a deception on a grand scale.

Unfortunately, people have been tricked into believing the RBA’s BS and have bought (and borrowed) into this lie.

Our economy is not strong…it’s weak…and getting weaker with each passing day.

I appreciate that runs counter to what the person in the street believes.

Don’t get me wrong. I’m not anti-debt.

When used prudently to buy quality assets at fair value and/or for productive purposes, debt can be constructive in generating sound economic growth.

That’s what happened in the decades immediately following the Second Word War.

Since the 1980s, debt has been increasingly used to fund lifestyles beyond people’s means.

As a society, we have moved well past the constructive phase of debt accumulation.

We’re well into the destructive phase.

And a prime example of this is the runaway success of ‘buy now, pay later’ firms such as Afterpay.

Since listing in mid-2017, the share price of Afterpay has soared 10fold.


Money Morning

Source: Google

[Click to open in a new window]

The success of ‘buy now, pay later’ firms is a sad reflection of our addiction to debt-funded consumerism.

When the debt bubble meets its inevitable pin, firms like Afterpay will become an afterthought.

Was I wrong in 2015?

Yes and no.

As far as timing goes, yes, I was wrong.

Common sense dictated that we could not possibly go a further $2.5 trillion deeper into debt without hitting the wall sooner rather than later.

But as we’ve learnt over the past decade, common sense can be suspended for much longer than you think is possible.

When people — encouraged by central banks — have the speculative bit between their teeth, they can go well beyond what’s considered rational.

However, the premise of Australia heading into a long bust is, in my opinion, still correct.

The following is an extract from The Australian Financial Review, published on 3 January 2020…

About one in five mortgage borrowers, or about two million households, are struggling to make repayments, despite record low interest rates, according to analysis by Finder, a comparison website.

“Household debt remains high and there are a lot of borrowers sitting on large mortgages,” said Brendan Coates, household finances program director for the Grattan Institute.

“Wages and inflation are not growing very strong, which means incomes are not rising to meet rising costs and debt is not deflating away.”

Household gearing is a record high of 202 per cent of annual income, compared to about 120 per cent in 2000 and 178 per cent in 2010, according to NAB analysis.

Households being squeezed by debt burdens — even with the lowest rates in history — is precisely what was discussed in the 2015 edition of The End of Australia.

But you know what’s really worrying?

I think it’s going to be far worse than what I thought would happen in 2015.

Why?

The mortgage stress being experienced by two million households is occurring in the good times.

What’s going to happen when we actually experience a truly global debt crisis? One that makes the events of 2008/09 look and feel like a picnic?

Since 2015, we’ve added $2.5 trillion to our nation’s debt load. In the short term, this has helped keep the GDP needle in the positive. Unfortunately, the illusion has created delusion.

In the belief of our so-called strong economy, people have taken on debts without thinking of what happens when a recession does hit.

In the longer term, this misguided belief has placed us in a highly vulnerable position. Our defences have never been weaker…and with each new dollar of debt added to the pile, the situation becomes a little more brittle.

The End of Australia may have been deferred, but it will not be avoided.

Eventually, a combination of logic, mathematics and history will prevail.

And when it does, it’s highly likely that parallels between the economic hardship of the 2020s and the 1930s will be made.

The sheer scale of the downturn has me convinced that policymakers, in an effort to prevent wholesale social upheaval, will introduce a raft of (unprecedented) stimulus responses.

What we know from 20th century history is that no decade ever replicates the one that preceded it.

The 2020s will be nothing like the 2010s.

Where do markets at record highs go to from here? Where do unemployment levels at record lows go to from here? Can a country loaded with debt and growing mortgage stress not experience a recession for another decade?

Think about. Your future financial well-being depends on how you critically assess those questions.

Regards


Signature
Vern Gowdie,
Editor, The Rum Rebellion


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.


One response to “What We Know from 20th Century History

  1. What Vern talks about is simply common sense, and a good part of the population understands it. In a well worn word: you can not sustain spending more than what is your income.
    A lot of people do, and the well known consequences catch up. But what we do not understand is: how does it work with the whole world, for so long.
    No wonder that there is a new school of money management, where “the debt is irrelevant”.
    As Vern points, a private borrower comes to a dead-end and the chain reaction gets set into motion.
    JL

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