False Economy: Central Banks Won’t Admit They’ve Stuffed Up

Dear Reader,

My mate’s reno is the classic case of ‘false economy’.

In economics, a false economy is an action that saves money at the beginning but which, over a longer period of time, results in more money being spent or wasted than being saved.’


Cheap materials. Corners cut. Dodgy workmanship.

Now it’s coming back to bite him. Cracks in the plaster. Paint peeling. Water leaks.

Initially, the reno looked OK…provided your inspection went no further than a casual glance. But now the problems are obvious for all to see.

Where to from here?

Does he correct or compound his errors?

  1. Take it down and start again with better quality materials and expertise?


  1. More Spakfilla, quick repair job on the leaks and paint over the mistakes?

Common sense says he should go with a) and put the DIY project down to experience.

But that’s easy for me to say. It’s not my pride (or money) that’s at stake. Trying to ‘solve’ his DIY problems with the same materials and workmanship that created this mess is probably not the wisest choice.

However, I have a sneaking suspicion the ‘putty, paint and plug it’ option is going to prevail.

He just can’t help himself.

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This (disaster in the remaking) reno would be perfect for one of those fixer-upper lifestyle shows.

Viewers would be mesmerised. Aghast at why someone would deliberately make a bad situation worse. What were they thinking…or more precisely, not thinking?

My mate’s house of cards pales into insignificance when compared with the one built by central bankers. But the principles are the same.

Central bankers have created the ultimate false economy. The blueprint for the monumental edifice of perpetual growth was simple in theory but has proven to be more complex in practice.

The building blocks were debt, inflation and population.

This chart — an oldie but a goodie — shows the relationship between global debt and GDP growth from 1950–2012.

The simple blueprint worked well from 1950–1980…a dollar of debt generated a dollar of economic output.

The beginnings of the false economy

Then came the disconnect…the beginnings of the false economy. More and more debt was needed to generate the highly desired (and addictive) growth and inflation.

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Source: whythings.net

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Here’s an update on the numbers.

From CNN Business on 14 January 2020 (emphasis added):

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The world’s already huge debt load smashed the record for the highest debt-to-GDP ratio before 2019 was even over.

In fact, it broke that record in the first nine months of last year. Global debt, which comprises borrowings from households, governments and companies, grew by $9 trillion to nearly [US]$253 trillion during that period, according to the Institute of International Finance.

Since the oldie but a goodie chart was published in 2012, global debt has increased by more than US$70 trillion.

According to Worldometer, global GDP in 2019 was US$87 trillion an increase of US$17 trillion since 2012.

The 1:1 debt to GDP growth ratio is a relic of economic history, a time of real economic activity.

In this new false economy, the debt to GDP growth ratio is 4:1.

Debt (in ever increasing amounts) has created the illusion of growth.

Credit-funded consumption generated artificial demand. That demand produced employment opportunities. More people employed created more demand for debt.

The foundations upon which this monumental edifice to perpetual growth (and central banker ego) was built are structurally unsound.

Populations cannot grow indefinitely. Debt, as we know from history, has limits. And, society’s attitude towards debt and savings can change.

Every time we have the inevitable shift in the economy’s tectonic plates, the cracks in the false economy grow ever wider.

The GFC — recognised at the time as the most severe recession since the Great Depression — prompted the Federal Reserve to bring out all manner of DIY props, paper and dodgy methods to support the false economy.

As the following chart shows, the Fed’s makeshift repairs during the GFC were purely cosmetic when compared to the most recent efforts…and this folks, is just the beginning.

In the space of two months, the Fed’s balance sheet has expanded by more than the taxes collected by the US Treasury in a whole year.

The Fed has brought in truckloads of economic Spakfilla — buying corporate debt, suppression of cash rate and talk of yield-curve control, payroll protection programs, term-asset backed loans and the list goes on.

All the Fed’s actions and those of the RBA are designed to keep the perpetual growth machine in motion, do whatever it takes to keep the banks’ lending and people borrowing.

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Source: Meridian Macro Research

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Central banks went for the easy, cheap and lazy option to generate growth.

Lower rates and a reliance on society’s desire/compulsion to have what they really can’t afford.

Any clown with a basic understanding of human nature could have done this.

You’d have thought that those with PhDs in economics would have known better…but given that they keep doing the same thing over and over and over again and expecting different outcomes, it’s clear they are as clueless as they are dangerous.

Even if they manage to somehow ‘successfully’ cover up this latest DIY disaster, what happens next time the tectonic plates move around?

Decades of makeshift measures to support this false economy has taken us to a point from which there are no good options.

Central banks are not about to admit they have stuffed up

In a media conference on 10 June 2020, Fed Chairman Jerome Powell was asked…

Mr. Chairman, Michael McKee with Bloomberg Television and Radio. I came across a statistic the other day that amazed me. Since your March 23rd emergency announcement, every single stock in the S and P 500 has delivered positive returns. I’m wondering, given the levels of the market right now, whether you or your colleagues feel there is a possible bubble blowing that could pop and setback the recovery significantly, or that we might see capital misallocation that will leave us worse off when this is over?

Second, inequality is not just about wages, it’s also about wealth, and a number of studies have suggested that by keeping rates low for so long and targeting the markets after the great financial crisis, that the Fed did contribute to wealth inequality in this country. And I’m wondering if you think there is some tweak or some message you could give that would affect that?

Two great questions.

Are you concerned about an asset bubble? Did the Fed’s ‘lower for longer’ interest rate policy contribute to wealth inequality?

This was Chairman Powell’s edited response…

So, we — we’re not looking to achieve a particular level of any asset price. What we want is investors to be pricing in risk, like markets are supposed to do…I think our — our principal focus though is on the — on the state of the economy and on the labor market and on inflation.

Now inflation, of course, is — is low, and we think it’s very likely to remain low for some time below our target. So, really, it’s about getting the labor market back and getting it in shape, that’s — that’s been our major focus.’

Powell’s non-answer to the wealth inequality question was, in itself, an answer.

And his response to the current bubble was so disingenuous…

…we’re not looking to achieve a particular level of any asset price. What we want is investors to be pricing in risk…

Let’s say investors decide the US share market is the riskiest it’s ever been and the Dow plunges over a cliff…will Chairman Powell sit back and watch the show as an interested spectator?

Given that the US sharemarket has become a proxy for the US economy, Chairman Powell will do everything in his power to achieve a particular level on the downside for the Dow.

The charade continues. The truth about the false economy cannot be admitted…so the lies, cover ups and dodgy schemes continue.

However, the reality of tens of millions of people not going back to work — because the desire/capacity for debt-fuelled consumption has waned — is a crack in the system that not even the doctored data can cover up.

Do the inept architects and builders of the collapsing false economy finally admit they stuffed up?

Not on your Nelly. No way Jose.

That’s when we get Modern Money Theory (MMT)…money will be dropped from the skies as a diversion to stop people from taking more than a casual glance at the false economy these economic charlatans have created.


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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