Will Central Bankers Blow a Fourth (and Even Bigger) Bubble?

Dear Reader,

Imagine WHO (World Health Organisation) convenes a global press conference.

One by one the eminent medical professionals take their seats. The director-general waits until all is quiet to deliver the findings of their research.

‘Ladies and Gentlemen of the press, the cure for COVID-19 is to consume more bats.
Any questions?’

The gathered press is in stunned silence. Completely dumbfounded. After what appeared to be an eternity, the silence is broken by one lone voice.

‘If I understand you correctly, you are saying the cure for a virus caused by eating bats is to eat more bats. Is that true?.’

WHO’s response ‘Yes. That’s exactly what we are saying.’

Media response ‘With all due respect, you lot are bat sh*t crazy.’

Apologies if you found this a touch too insensitive. But in order to get a message across, sometimes shock therapy is needed.

If we go back a decade and role play this scene using a different crisis and another internationally recognised institution…

Central bank: ‘Ladies and gentlemen of the press, the cure for the 2008/09 debt crisis — the one that almost brought the world to its knees — is for the system to take on more debt.’

Gathered media: ‘Great idea. That’ll be good for the markets. Pure genius. Glad we have you at the helm.’

Same stupid cure. Yet, a completely different response. Go figure.

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Or, to further highlight the patently absurd, we could say the cure for obesity is more greasy food and fizzy drinks or the cure for alcoholism is more hard liquor.

These equally farcical notions would, quite rightly, be dismissed as the rantings of medical quacks.

Yet, somehow the central bankers ‘cure’ (which is just as senseless) is afforded the gravitas of ‘intellectual rigour’.

These economic quacks get away with this assault on common sense because of who and what’s behind them.

Politicians, financial institutions and a forelock tugging economic commentariat.

And, we the public, are silly enough to go along with it. Why? We’re lazy. Who really wants to think that hard? Besides, everyone else is doing it.

Instant gratification is so much easier. Why go through the hardship of savings and waiting? That’s so 1950s.

Enjoy now. Pay later.

The drum of central banker stupidity and recklessness is one I’ve been beating for some time. Over the years I’ve tried a variety of ways to get people to see just how insane these academic theorists really are.

In the March 2019 issue of The Gowdie Letter, I wrote: 

The Global Financial Crisis had brought the easy borrowing and free spending days of pre-2008 to an abrupt end.

In the aftermath of crisis, people were struggling to understand what the ‘new normal’ meant.

Society had become conditioned to believe continuous asset price growth fuelled by increasing levels of debt, was normal.

[Prior to the GFC] every level of society — government, central banks, corporate and household — bought into the notion that a virtuous cycle of debt and asset price growth was a sign of economic strength.

With each passing year, lending standards went lower and asset prices went higher…GDP growth soared.

During the boom years of 2003 to 2007, US GDP growth bumped up around the 5% per annum level.

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Source: Trading Economics

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The longer this pattern (of insanity) continued, the greater the conviction in this being “normal”.

And, I can tell you from personal experience, no amount of reasoned argument to the contrary could sway the majority from this entrenched belief.  

As we found out in 2008, it was all a giant Ponzi scheme.

Without the injection of vast amounts of debt, the US economy (as measured by GDP) plummeted into negative territory.

This reality check, was the “new normal” that society — at all levels — was grappling with.

With hindsight, we know central banks and governments desperately wanted a return to the “old normal”…asset prices and consumption levels driven higher (and higher) by an easy money policy.

To assist you in visualising the difference between the global economy (and financial system) of 2007 and today, here’s a photo.

The fellow on the left is 2007…

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Source: Largest body muscles man in the world 2015 Steroids UK

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The coordinated efforts of global central banks to (relentlessly) pump “steroids” into the economic body [since 2009], has delivered an outcome that is anything but normal…it’s grotesque.

Yet, the majority don’t, won’t or can’t see it.

We blindingly accept that as long as the GDP needle remains in the positive, all’s good with the world.

What’s the cure to our debt crisis?

And here we are today, facing another (even larger) debt crisis. What’s the cure?

Roll out a raft of rescue packages — stuffed full of newly minted dollars — to prop up debt-addled governments, corporations and households.

What’s the long-term objective here?

Is it to stabilise the system and slowly return the steroidal freak of an economy back to something resembling (somewhat) normal?

Perhaps we’ll see a model where people are encouraged to find a better balance between savings and spending. Less credit-fuelled consumerism. One where interest rates are pegged to a level that’s an acceptable balance for saver and borrower.

No. No. No. Stop right there.

That sort of wishful thinking — believe it or not — is considered insane, bordering on quackery.

Central banks don’t want balance…they want imbalance. More debt less savings. Punitive interest rates. Forever rising asset markets.

I know my little drum kit is no match for the orchestrated noise coming from the institutional pillars of our society.

What’s the central banker’s real objective?

Pure and simple: it’s a resumption of the debt-financed-consumption growth model. The very same flawed model that’s blown (and busted) three asset bubbles since the late 1990s.

When do they want it? Preferably yesterday, but tomorrow can’t come soon enough for these numbskulls.

They have created a grotesque MONSTER, one that’s gone way beyond their control. The days of simple tweaks to the interest rate dial are long gone.

Any easing in debt accumulation, throws the system into complete chaos.

Trillions and trillions and trillions of dollars need to be mobilised to paper over the truth.

And that truth is ‘you cannot keep bringing consumption forward from the future in ever-increasing amounts without someday having that future arrive.’

And when it arrives, the cupboard is bare. That’s when the debt-funded consumption model collapses under its own weight. Which is what we’re seeing today.

Without consumption (a lot of which we’re finding out we don’t really need) the system is upended and in need of extraordinary rescue measures.

A fancy title like ‘unconventional monetary policy’ is used to dress their idiotic cure up as something profoundly economic.

What rubbish. The economic commentariat swallow it hook, line and sinker. Why not call it out for what it really is? Zimbabwean-style voodoo economics.

The problem is that in having created a system that’s promised so much to so many, there is no easy way to let people down.

Will it be another Great Depression?

An extremely painful episode that prunes enough debt from the system to encourage rejuvenated growth?

Or, will it be a death by a thousand cuts? One where ‘temporary’ income support measures become more permanent for a greater number of un and underemployed. People and businesses will be kept on some form of government handout life support.

Or, will the central bankers pull off the impossible and blow a fourth (and even bigger) bubble? If they do, imagine the carnage that’ll cause when it bursts.

I think the odds are firmly stacked against a fourth bubble. Will there be the willingness and capacity to take on the amounts of debt needed to reflate the bubble?

Since 2008, global debt rose from US$140 trillion to US$250 trillion…an 80% increase.

To repeat that growth rate requires the current debt pile to expand to US$450 trillion.

Households and corporates are struggling to pay back what they already have (with the lowest interest rates in history), how on Earth can they afford another US$200 trillion?

Best guess is our future is going to be depression-like or stagnation.

Either way, the changed economic conditions means there’s serious trouble ahead for asset prices.

What we’re seeing now on Wall Street is a clear case of hope triumphing over experience.

When traders finally realise all hope of returning to the debt-fuelled growth model is lost, then we’ll see some real downside action on all markets…shares, property and bonds.

Those who think we can return to a Roaring Twenties-type economic model, demonstrate an ignorance of history.

The 1930s were nothing like the 1920s. And the 2020s will be nothing like the 2010s.

History shows us that those who fail to heed the lessons, tend to pay a very high price.

If ‘eating bats to cure a health crisis caused by eating bats’ is certifiably crazy, then how can you possibly rationalise away the madness of ‘more debt is the cure for a crisis caused by more debt’?

Both are insulting and illogical propositions.

And if ever there was a time to apply clear-headed logic, it is now, before the next big wave down.


Vern Gowdie,
Editor, The Rum Rebellion

PS: Famous economic forecaster Harry Dent warns of a ‘crash of a lifetime; coming in 2020… Get the 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.

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