Paper Foundations, Structural Problems — The Australian Debt

Yesterday I had a conversation with a high-profile, Queensland-based business person.

Over the past four decades they’ve built a national business and amassed a fortune in the many hundreds of millions of dollars.

They confided ‘Last year was the toughest in my career.

When asked ‘Do you think the worst is behind us?

Their reply was blunt, ‘The government is buying this recovery. Wage subsidies. Cheap loans. Give-away travel. This is not sustainable. Where is the accountability?

This no-nonsense assessment from a self-made person contrasts sharply with the one we hear from politicians, economic hacks and the corporate ladder climbers.

In the 9 March 2021 issue of The Rum Rebellion, I wrote:

Last week, our Treasurer proudly boasted…

“Today’s National Accounts shows the Australian economy is strengthening and the Morrison Government’s economic recovery plan is working.

In the December quarter, Australia enjoyed economic growth of 3.1 per cent, significantly beating market expectations of 2.5 per cent.

This is the first time in recorded history that Australia has seen two consecutive quarters of economic growth of more than 3 per cent.

As you would expect, the mainstream media and economic commentators “waxed lyrical” about what a tremendous result this was for Australia.

But let’s do some back of the envelope maths here (using rounded numbers).

Australia’s annual GDP is $2 trillion…on a quarterly basis, that’s $500 billion.

$500 billion x 3% = $15 billion…over two quarters, it’s $30 billion…give or take.

Not a single solitary soul in the economic commentariat bothered to ask this question of the Treasurer…“is that all we get for going $212 billion deeper into debt?”’

Budget Aggregates and Major Economic Parameters

Source: Australian Government

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Just to confirm those back-of-the-envelope calculations were close to the mark, here’s a screenshot from the Australian Bureau Statistics (ABS) site:

Quarterly GDP Number

Source: ABS

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The Sep 19 to Dec 19 quarterly GDP number was $497 billion.

EXPOSED: The truth behind Australia’s ‘miracle’ economy

In October 2019, I wrote an article on how Australia’s almost 30-year ‘recession-free’ run was a fraud built on a pile of debt.

Australia’s last recession ended in September 1991.

According to the Australian Debt Clock, our nation’s total debt at that time was (a mere) $850 billion.

To illustrate how deceitful the claims of our economic prowess really were, the article included this tally from the Australian Debt Clock.

Australian Credit

Source: Australian Debt Clock

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Our total national debt in October 2019 was just shy of $8 trillion ($8,000 billion).

Australia’s so-called economic ‘success’ has been bought on the never-never. That was then. What about now?

We know from the ABS data the GDP needle has hardly moved.

But what about our nation’s indebtedness?

This is the latest from the Debt Clock…

Australian Credit

Source: Australian Government

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Over the past 18 months, we’ve added another $1 trillion ($1,000 billion) to our debt pile…for absolutely NO economic gain.

What the media commentators tout as a ‘success’ is, in reality, a national disgrace…aided and abetted by the RBA’s mindless and reckless interest rate settings.

There will be NO inflation in Australia…we simply cannot afford it.

A mere 1% rise in interest rates would increase the debt servicing cost on our debt pile by $90 billion.

Just to pay the additional interest cost would result in 4.5% of GDP being sucked out of the economy.

There are no free lunches. We cannot have our economic cake and eat it too.

All those boastful claims made by past and present treasurers and RBA governors come with a future cost…one they’ve all conveniently omitted.

And with the property market running red-hot, we can expect our already overly-indebted household sector to fashion an even longer and stronger noose for its own neck.

But what the heck, when you’re an RBA executive or politician with a guaranteed taxpayer-funded pension to fall back on, why should you be thinking about anything but the short term.

The longer-term problems resulting from this irresponsible pursuit of growth at all costs will be someone else’s to deal with.

This week’s The Gowdie Letter included this extract from the creator of the ‘Four Phases of a Bubble’, Dr Jean-Paul Rodrigue…

Although manias and bubbles have taken place many times before in history under particular circumstances (Tulip Mania, South Sea Company, Mississippi Company, etc.), central banks appear to make matters worse by providing too much credit and being unable or unwilling to stop the process when things are getting out of control (massive borrowing). Instead of economic stability regulated by market forces, monetary intervention creates long term instability for the sake of short term stability.’

The need for short-term stability is driven by survival instincts.

These gut reaction solutions address the immediate problem, but only set the system up for greater pain at some future point.

The so-called ‘solutions’ just keep delivering greater quantities of the same tried and failed policies (more debt, more stimulus, lower rates). These only serve to feed the problem…not address the real cause…we are living well beyond our means.

But what politician wants to grasp that nettle?

Australia is merely following the US playbook.

During the initial stage of the pandemic, US GDP (blue line to right-hand side) fell by US$2 trillion.

In response, the Trump Administration pushed the budget deficit (red line to left-hand side) to US$3.2 trillion and Biden has felt the need to throw in another US$1.9 trillion.

Federal Reserve Economic Data - Debt Data

Source: Federal Reserve Economic Data

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That’s a US$5.1 trillion ‘solution’ (so far) for a US$2 trillion ‘problem’…but you can bet your house on there being more to come.

The need for each successive response to be greater than the last is evident in the comparison with the GFC (the worst economic crisis since the Great Depression).

The budget deficit, at its lowest point, fell to US$1.4 trillion…almost a quarter of what’s been deployed this time around.

And look at the Fed’s response.

During the GFC, the Fed’s immediate response was to create an additional US$1.2 trillion in new money.

Last year it was US$4 trillion.

Federal Reserve Economic Data - Debt Data

Source: Federal Reserve Economic Data

[Click to open in a new window]

Based on the simple logic of ‘you cannot solve a debt crisis with more debt’, it’s inevitable we will face another period of (even greater) instability.

If $1 trillion of new debt in Australia has not added one cent to economic growth AND US$5.1 trillion has still not been enough to restore the US economy, then it begs the question…how much will be needed next time to ‘save the day’?

The paper foundations upon which our economies have been built has resulted in serious structural problems within the system.

We cannot keep adding more debt to this already creaking edifice to growth without there being serious consequences…ones the Fed and other central banks will not easily paper over.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

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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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