Negative Rates Are Coming to Australia

Dear Reader,

You can’t help but look.

Face so taut you could ricochet peanuts off it. Bee-sting lips with their own postcode. Cheekbones that’d do a chipmunk proud.

And, that was above the neck.

Below the tightly-stretched neckline, breasts and buttocks were inflated well beyond natural limits.

I’m guessing this was the counterweight needed to remain upright.

Transfixed by this sight before me, I couldn’t help but wonder when was the tipping point reached?

And once reached, there’s no going back.

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The older, saggier and flabbier you get, the more and more work you need to keep things tight, up, in and out.

New York socialist Jocelyn Wildenstein’s obsession with trying (and failing) to retain her youthful looks is the original textbook case of glamour to grotesque.

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What was once attractive is now so distorted it bears little resemblance to its original form.

Even with these photos in circulation, people still subject themselves to varying forms of cosmetic disfiguration. I don’t get it.

But as they say, beauty is in the eye of the beholder.

The transformation from normal to weirdly abnormal is easy to identify in before and after photos.

Now, this is where you have to let your imagination run free for a moment.

Imagine the photo on the left is the 1950s and 1960s economy.

Young, vibrant, energetic and full of promise.

The Western world’s manufacturing bases helped distribute the wealth more evenly amongst society.

Society had a spring in its step, a glow in its skin and a world of promise ahead.

But we can’t stay that way forever.

The glory days of economic youth started to fade in the 1970s.

Average US wages — in real (after inflation) terms — peaked in the mid-1970s.

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Source: Pew Research

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Middle-age spread — in the form of high inflation — played havoc with the global economy.

The youthful spring in the step was replaced with stagnation.

Flatlining incomes and rising costs (energy and fuel bills) put the squeeze on households.

In an attempt to inject youthful plumpness into the economic numbers, central banks relied on fillers…mortgages, home equity loans, subprime lending, credit cards, car loans, student debt, margin loans, corporate bonds and government debt.

Credit infusion did wonders for the economy

The growth numbers looked truly impressive…attracting wolf whistles from international admirers.

But beneath this outward appearance of beauty was an ugly set of numbers.

Total debt within the system was building to a toxic level…rising by more than US$70 trillion over the past 40 years.

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Source: Federal Reserve Economic Data

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The injection of more and more credit fillers in the system required the cost of debt to fall significantly.

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Source: Federal Reserve Economic Data

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Economic plastic surgery was not confined to the US.

Australia’s economic body was subjected to the same invasive procedures.

Central banks the world over embraced these same economic enhancement techniques.

The recent photo of Jocelyn Wildenstein is what today’s global economy looks like.

Distorted well beyond recognition of what our once-vibrant economy looked like.

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Instead of allowing the global economy to mature into a phase of slower and lower growth, central bankers remain resolute in their commitment to constantly meddle.

The ‘nips and tucks’ to interest rates applied by Fed Chairman Greenspan after the 1987 market crash have now reached the absurd.

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To push up the sagging US economy, the Fed’s latest money printing exercise created more dollars than is collected in tax receipts.

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Source: Meridian Macro Research

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And, what makes this really scary — even scarier then turning on the light and seeing Jocelyn looking back at you — is the worst of the economic damage is yet to reveal itself.

What do these economic butchers have in store for us when the double Ds deflate, butt implants implode, and face fillers melt away?

Since the late 1980s, the global economy has been subjected to all sorts of invasive (and more dangerous) procedures.

Obscene amounts of QE to plump up asset prices. Financing government spending with printed dollars. Buying corporate bonds of inferior credit quality.

And, the highly unorthodox use of negative rates is once again raising its very ugly head.

Negative rates in Europe and Japan have failed to generate the much coveted and longed for central butcher’s (sorry, bankers) holy grail (sustainable inflation).

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Source: Federal Reserve Economic Data

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The only ‘successful’ outcome from negative rates has been to reduce the profitability of banks and further punish savers. Pure genius…

The ECB [European Central Bank]  first introduced negative interest rates for the 19 countries that use the euro in 2014 in a bid to boost inflation and economic activity following the region’s debt crisis.

But it has faced increased calls to put an end to a policy that’s dragged on for longer than initially expected.

Banks have complained about the damage negative rates have done to their earnings, and savers have been penalized by a policy that encourages people to borrow and spend.

At the World Economic Forum in Davos, Switzerland, bankers made clear they’ve had enough.

CNN Business, 23 January 2020

Bankers have had enough. Savers have had enough.

But enough is never enough for the economic butchers. They always want more and more and more.

In the eyes of the central banker and institutional economist beholders, the global economy is a thing of beauty that cannot be allowed to get ugly.

Why don’t they save us all this misery and simply go to Specsavers? Simple answer…their own vanity would not allow this.

On 2 June 2020 (before the RBA decision on interest rates), The Sydney Morning Herald reported (emphasis added):

[Westpac Chief Economist] Mr Evans said negative rates would enable the nation’s major banks to cut their lending rates, helping the economy by enabling businesses and mortgage holders to borrow at extremely low cost.

And there’s the go-to cure for all economic ills in highlighted section.

Take a sharp scalpel to interest rates and encourage everyone to go deeper into debt.

Don’t they see the flaw in this thinking? Let’s inject more of the stuff into the system that’s caused the problem in the first place.

Let’s indulge this line of thought for a millisecond — because that’s about as long as it takes to show the stupidity in this reasoning.

We take rates negative. Borrowing levels go up.

Ok so we now have even more debt in the system…a system that’s already registering the highest level of mortgage stress.

So, what happens next time these artificial enhancers start sagging like a wet Sao? And, please do not insult me and say ‘there won’t be a next time’. Yes, there will.

Negative rates are the D.U.M.B.E.S.T idea ever.

Yet, this utter stupidity passes for rational economic policy.

It’s blindingly obvious the quacks in charge of economic surgery have not stepped back and surveyed their handiwork.

They have created a ‘Wildenstein’.

The SMH article continued (emphasis added):

Negative rates could also help the RBA meet its 2 to 3 per cent inflation target.

The Melbourne Institute’s monthly inflation gauge on Monday showed prices falling by a record 1.2 per cent in May, taking annual inflation to just 0.1 per cent. Its measure of underlying inflation dropped by 0.3 per cent to be 0.5 per cent over the year.

The RBA has already warned inflation is likely to turn negative because of falling demand and policy interventions such as free childcare.

The botched negative rate operations in Japan and Europe have clearly shown that negative rates DO NOT help meet — on a sustainable basis — the ‘2 to 3 per cent inflation target.

Medical science has made great progress because it has learnt from the mistakes of others.

Economics likes to think of itself as a science, but its failure to learn from its monumental mistakes means it’s nothing more than voodoo and witchcraft.

This line tells you all you need to know about how distorted central bank thinking is…

The RBA has already warned inflation is likely to turn negative because of falling demand and policy interventions such as free childcare.

Inflation is going to be negative, in part, because of…free childcare.

Let’s get this straight.

By reducing the cost of a good or service — in this case to nothing — it means we are not going to get inflation.

I can’t see a problem with that and I’m damn sure the households with kiddies in childcare don’t see one either.

However, in the warped world of central bank thinking, the RBA would be delighted if childcare costs continued to rise so it could deliver on its inflation target.

The ugliness in what these butchers have created is starting to be revealed in the twisted logic used to justify these invasive procedures.

When will they stop?

The short answer is they won’t. This is their life’s work.

Eventually, we reach a tipping point…when enough is enough and the economic body can no longer endure these increasingly desperate and unorthodox measures.

Are we at that point?

I think we are very close.

Deflation is in our future. Negative rates — despite denials — are coming in the US and here in Australia.

Why? Because that’s what these butchers do. They are committed to the ugly into the grotesque.


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.

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