Central Bankers are Taking Us to the Financial Gallows

The law was brutal in 17th century England, the theft of goods worth more than a shilling (10 cents) resulted in a one-way trip to the gallows.

If you were going to swing for stealing an item worth a shilling, then why not pinch something of even greater value? What was there to lose?

That logic first appeared in print in John Ray’s English Proverbs of 1678…

As good be hang’d for an old sheep as a young lamb.

Central bankers have fully embraced this philosophy. We are in so deep now, might as well keep going for broke…literally.

The latest quarterly update from Hoisington Management stated (emphasis added):

The U.S. is caught in a debt trap, a term originated by the Bank for International Settlements [BIS]. A condition where too much debt weakens growth, which elicits a policy response that creates more debt that results in even more disappointing business conditions.

What’s a debt trap?

Claudio Borio, Head of the Monetary and Economic Department at the BIS, produced this chart in 2018:

Port Phillip Publishing

Source: BIS

[Click to open in a new window]

The higher the debt (right-hand side), the lower the real (after inflation) interest rates (left-hand side).

Achieving economic growth required more debt. More debt required lower rates.

The problem is, more debt does not lead to more growth.

According to Hoisington Management (emphasis added):

each additional dollar of debt in 1980 generated a rise in GDP of 60 cents, up from 54 cents in 1940. The 1980’s was the last decade for the productivity of debt to rise. Since then this ratio has dropped sharply, from 42 cents in 1989 to 27 cents in 2019.

In table form, the deterioration looks like this:

Port Phillip Publishing


If the debt-to-generated GDP ratio falls to 10 cents, then it’s going to take $10 of debt to create a $1 of GDP.

Will the Fed come to its senses and realise this more debt/lower rate policy is a pathway to destruction?


The Fed is committed to being hung for a sheep.

In a brand new report, market expert Vern Gowdie warns of the dangers waiting in a post-COVID-19 world. Plus, he outlines the steps you should take now to protect your wealth. Learn more.

As reported in the Wall Street Journal on 14 October 2020 (emphasis added):

The Federal Reserve’s point man on financial regulation [Randal Quarles], said the Treasury market has grown so large that some level of central bank involvement may need to continue to ensure orderly trading conditions.

“It may be that there is a simple macro fact that the Treasury market being so much larger than it was even a few years ago, much larger than it was a decade ago and now really much larger than it was even a few years ago, that the sheer volume there may have outpaced the ability of the private market infrastructure to support stress of any sort there.

‘“Will there be some indefinite need for the Fed to provide — not as a way of supporting the issuance of Treasuries, but as a way of supporting a functioning market in Treasuries — to participate as a purchaser for some period of time?

You bet the Fed will be participating as a purchaser of US Treasuries…to fund record US budget deficits.

Central bankers are taking us to the financial gallows

That’s the path we’re on. Central bankers are taking us to the financial gallows.

To play with the words of the proverb, it is the sheep taking the lambs to be hang’d.

These economic theorists are nothing more than sheep. They blindingly pursue a policy that even the BIS (the central bank to the central banks) has identified as a trap.

We, the lambs, are going to be the ones who hang for this crime against rational economic management.

The sheep grazing in the RBA paddock are on the same pathway.

As reported in Reuters on 19 October 2020 (emphasis added):

Australia’s central bank is expected to cut key rates to a historic low of 0.1% at its monthly policy meeting next month, a majority of economists polled by Reuters showed, as it looks to boost jobs and economic growth.

Analysts also predict the RBA would expand its government bond-buying programme.

“We now think that a proper Quantitative Easing (QE) is simply a matter of time and we would not rule out a near-term announcement,” said RBC economist Su-Lin Ong.

ANZ economists expect a A$100 billion of QE, targeting Australian government bonds with maturities between five and ten years.

Have you ever heard such nonsense? What can rates at 0.10% do, that 0.25% isn’t already doing? And when 0.10% doesn’t do the trick, will zero be any better?

The RBA is also participating as a purchaser in our treasury market.

Why have budgets blown out so badly that central banks need to print and purchase? The need to fund cleverly named welfare packages.

This form of debt is what’s known as…unproductive. Productive debt produces an income stream to assist in repaying the loan.

Whereas, welfare spending is just a big, black hole…one you can never fill with enough dollars.

Be very careful not to get caught in the debt trap…

People get addicted to handouts. They want more. And every time there’s a disruption in the never-ending growth story, the cries for even greater government assistance will grow louder.

Central banks are hoping to generate higher inflation as a means of reducing debt in real (inflation adjusted) terms.

Claudio Borio, from the BIS, quite rightly points out the central bankers should be very careful what they wish for (emphasis added):

A “solution” sometimes put forward is to reduce the debt through higher inflation. The world has already been there, and it was not a pretty sight. It would make little sense to return to an inflationary era after spending so much effort to escape from it. Once the inflation genie is out of the bottle, it is very hard to get it back in. Moreover, in order to have a lasting impact on the debt outstanding, inflation would need to be combined with financial repression. The costs would mount.

Central bankers will ignore this advice. Why?

Because they suffer from an extreme case of ‘superiority’ complex. When it comes to the economy, only they know how to manage it.

Yeah, right.

Look where these sheep have taken us to…

Negative rates.

Mountainous debt levels. Three asset bubbles within the span of 20 years. Record levels of household mortgage stress.

They ignore every single warning sign. The response to every crisis is we need to do even more of the same. These sheep are taking us lambs to the slaughter.

Be very careful not to get caught in the debt trap they are building for society.


Vern Gowdie 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 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