The Lies Within the Australian Growth Story

Seeing the future requires us to open our eyes. As best we can, we have to try to sort out the real from the unreal.

Being told you can cure a debt problem with more debt, is not real…it’s in the realms of fantasyland.

Yet, plenty of people have bought (or, more to the point, borrowed) into this carefully orchestrated version of ‘reality’.

The higher markets go, the more blinded people are to what’s really happening…overvalued assets become even more overvalued.

Sight is only ever restored after the inevitable and highly predictable correction has happened.

Leonardo da Vinci was a man way ahead of his time. A true visionary.

Among da Vinci’s many inventions were the tank, the helicopter, the flying machine, the parachute, and the self-powered vehicle.

He said…‘Blinding ignorance does mislead us. O! Wretched mortals, open your eyes!

Blind ignorance is what took the financial world to the abyss in 2008. And there was none as blind as those inside the system.

These extracts are from testimony given to the ‘US Financial Crisis Inquiry Commission’, held in April 2010 (emphasis is mine):

I think all of us bear — not just all of us at Citi — failed to see the potential for this serious crisis,

Robert Rubin, former Clinton Treasury secretary
and member of the Citigroup board of directors.

In hindsight, it’s very hard to see how these structured products could have been accepted in the way (that) they were accepted,

Charles Prince, Citi CEO

The subprime time bomb was hiding in plain sight…as the movie The Big Short showed us, others saw the problem with crystal clear clarity.

Just because detonation took longer than expected, it didn’t change the reality of the situation…tick, tick, tick…the bomb was still active.

In hindsight, 2008 was only a dress rehearsal.

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

With foresight, we can outline the case for a much larger disruption to the global economy…one that threatens to unwind much of the growth of recent decades.

Since the early 1980s, the global economy has grown due to increasing reliance on more and more people going deeper and deeper into debt.

To facilitate this ‘growth’ model, interest rates have fallen from the high teens down to barely zero (or beyond).

When you strip away all the economic mumbo jumbo, that’s the central bankers ‘growth’ model.

The share market has been a major beneficiary of this ‘growth’…the Dow Jones index has increased 29-fold (from 1,000 points to 29,000 points) over the past 37 years.

While this compound effect is now seen as ‘normal’, I can assure you it’s not.

The previous 29-fold increase in the Dow (from around 35 points to 1000 points) took almost 90 years.

Do you think it’s sheer coincidence the accelerated growth of the past four decades has occurred precisely at the same time as baby boomers reached their adult years?

Or, are the two joined at the hip?

If, like me, you think it’s the latter, then you’ll realise the global economy is nothing more than a giant Ponzi scheme.

The global economic pyramid scheme requires an ever-expanding base to support the apex AND (this is a very important, and) that base must have the financial means to support ever-expanding debt levels.

If we want to see what may lay ahead, it’s critical to look at the quantity and quality of future population growth.

Population growth

Population growth (along with debt) has been a major contributor to GDP growth…in Australia and other major economies.

Australia has been increasingly relying on more people, rather than improved productivity, to lift economic activity.

Business Insider, March 2018

And then there’s this extract from a Financial Times article written by Ian Goldin (professor of globalisation and development at Oxford University), my emphasis added:

Cutting immigration will hobble economic growth. It’s that simple. New research I have conducted with Citigroup suggests two-thirds of US growth since 2011 is directly attributable to migration. In the UK, if immigration had been frozen in 1990 so that the number of migrants remained constant, the economy would be at least 9 per cent smaller than it is now. That is equivalent to a real loss in gross domestic product of more than £175bn over 15 years. In Germany, if immigration had been similarly frozen the net economic loss would be 6 per cent, or €155bn.

Immigration has played an integral role in increasing GDP numbers.

Faced with population pressures, governments are forced to borrow to fund infrastructure projects…another boost to the GDP numbers.

Pressure is placed on property prices…forcing people to borrow greater sums of money…another boost to GDP numbers.

Immigration can be a valuable source of economic growth provided it’s ‘quality’ and not ‘quantity’.

If the immigration intake is based on bringing productive skill sets to your country then that’s quality immigration.

People who make a positive contribution to the economy can help grow the pie for all.

They are also in the financial position to take on debt…the lifeblood of our credit-fuelled system.

Whereas, accepting unskilled people into your country only serves to artificially boost GDP.

Governments spend money they don’t have to provide a variety of support services — welfare benefits, healthcare, public housing, legal aid etc.

This spending counts as economic activity, but it’s literally a false economy.

Europe’s refugee crisis is an example of growth in quantity not quality (productive output).

Former US Federal Reserve senior financial analyst, Danielle DiMartino Booth wrote (emphasis is mine):

…the migrant crisis and its price tag may appear to be a relatively new phenomena driven by the devolution of Syria. To the Italians, the saga has stretched on for a generation. By way of geography and proximity and little more, Italian taxpayers are obliged to bear the brunt of the cost of the immigrant crisis.

Consider that the population of foreign born residents has quadrupled since 2002 to over five million. With that as a starting point for calculating the tab, is it any wonder taxpayers are affronted by the $15,000 per annum, per capita effective tax hike to cover the cost of the hundreds of thousands of migrants who continue to flood Italy’s shores?

Before anyone takes this out of context as a cold-hearted view of the world, this is not a discussion about society’s humanitarian obligations.

It’s about whether the population base can…

a) Continue to expand in numbers sufficient enough to support the apex, and

b) Whether that expanding base has the means to continue borrowing at an exponential rate.

Governments digging deeper into taxpayer pockets to fund humanitarian programmes is NOT how an economy generates sustainable organic growth.

But it is one sure way to create a backlash against immigrants…

As reported in World Politics Review on 30 July 2019:

Late last year, a decree abolishing humanitarian protections for migrants in Italy became law. Pushed by far-right leader Matteo Salvini as part of a crackdown on migrants and refugees, the law threatens to drive Italy’s migrant community further to the margins as anti-immigrant sentiment rises across the country.’

Quality (value added) immigration is becoming a rarer commodity.

The following chart (based on UN projections) shows annual population growth in both the developed (OECD) and developing (BRIICS) worlds in terminal decline.

Future global population growth is dominated by poor countries (the green band)…predominantly Africa.

The Rum Rebellion

Source: economica.blogspot

[Click to open in a new window]

In the foreseeable future, global immigration — in economic terms — is likely to be more quantity than quality. And that has repercussions.

The backlash in Italy — to the rising cost of quantity immigration — is not an isolated case.

Campaigning on a platform of lower taxes and privatization, while capitalizing on growing resentment within Greece over migration, Mitsotakis and his right-wing New Democracy party won a landslide victory in parliamentary elections in July, securing nearly 40 percent of the vote.

resentment is mounting over the burden of migrants and asylum-seekers already in the country. New Democracy is seeking to harness that resentment for political gain, in part by ramping up its anti-migrant rhetoric.

World Politics Review, 15 January 2020

When the next credit crisis hits and people feel poorer, what’s playing out in Italy and Greece will spread through Europe and to other countries…which means ‘quantity’ immigration is likely to be restricted.

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

In Australia, discontent over immigration has also bubbled to the surface.

The Financial Review, July 2018:

…domestically, the tensions in that Australian success story [multiculturalism] are increasingly obvious.

Whether it’s the violence of Sudanese youth gangs in Melbourne or political calls for a radical decrease in the annual intake, questions about Australia’s immigration levels and approach are becoming much louder.

Those murmurings have been heard in Canberra. As reported by SBS News on 6 September 2019:

The number of migrants granted permanent residency has dropped to its lowest level in a decade as the [Australian] government pursues its “congestion-busting” approach.

When the next crisis hits and unemployment rises, the murmurings will turn to howls of protests.

‘What do we want?’
‘We want Australian jobs for Australians.’

Immigration numbers (in both quality and quantity) are likely to be reduced significantly to appease aggrieved electorates.

From both a statistical and political viewpoint, it appears that the ability to expand the base of the global Ponzi scheme (in sufficient numbers) is rather limited.

Absent a fresh injection of new borrowers (with the financial capacity and desire to borrow), the future is not going to be a repeat of the past.

When your eyes are opened up to how the model operates, you can see the real lies in the growth story we’re being told.


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 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