US Economy: What Have We Done and for the Next Generations?

When you survey the path we’ve travelled over the past four decades, our progressive march towards self-implosion comes into focus.

We’ve created a make-believe world…one that must surely end badly.

Tax revenues are not sufficient to meet promised (and growing) expenditures…so we borrow.

Household incomes are not sufficient to meet expected lifestyles…so we borrow.

Corporate revenues are not sufficient to meet debt servicing costs or dividends payments or to increase earnings per share organically…so we borrow.

Everything is on the never-never.


Because as a society we have become conditioned to want more return from less effort.

The US economy is the prime example of this (and where the US goes, we largely follow).

Since 1980, the average wage and salary (on an inflation-adjusted basis) has not increased to any great extent. The recent spike up is an aberration due to a large number of lower-paid workers being laid off when the economy was shut down. As those workers slowly rejoin the workforce, the trend will resume.

Wage and Salary Workers - 16 Years and Over

Source: Federal Reserve Economic Data

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In spite of the lack of any significant wages growth (among the general population), we see total financial assets as a % of household disposable income (blue line to left-hand scale), has steadily increased.

Federal Reserve Economic Data

Source: Federal Reserve Economic Data

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Incomes stagnate yet wealth rises…does that seem odd to you?

The great enabler of this illusion

The great enabler of this illusion has been interest rates (red line to right-hand scale)…falling from 18% to zero.

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The steady decline in the cost of debt has provided households (and corporates and governments) with the means to access society’s insatiable appetite for more.

With each passing year, self-destruction is all but assured. The longer the illusion remains people’s reality, then the more certain the ultimate fate.

Demands for more escalate. Expectations increase. And when the system falters, central bankers apply a disproportionate amount of triage. Which then reinforces the mindset of more. The cycle of ruin spins ever faster.

But it wasn’t always so.

The debt super cycle that began in 1950 has two distinct periods — pre-1980 and post-1980.

Prior to 1980, the frugal depression-era generation had a more responsible and respectful attitude towards debt. Debt was used primarily for productive purposes…not wanton spending on the latest consumer fad.

A dollar of debt (blue line) generated (almost) a dollar of economic output (GDP).

Dollar of Economic Output (GDP)

Source: Federal Reserve Economic Data

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Lending institutions were far more stringent in their loan criteria. Rising interest rates in the 1970s also contributed to keeping a lid on debt accumulation.

After 1980, these dynamics changed. Baby boomer consumers (eager to break the shackles from their austere parents) started to outnumber the older generation. Financial institutions relaxed lending standards. And as we know, interest rates fell…and fell hard.

Every graph on debt accumulation, shares and property markets shows a distinct upward trajectory after 1980. Credit creation flowed through to asset price appreciation.

The world of prosperity

Wealth was being generated like never before. The boomers were on a roll. In the midst of becoming wealthier, we rarely questioned why.

The world of prosperity — steadily increasing economic activity, increased share markets and rising property values — was taken for granted. This was how our world functioned. It was our norm.

It’s only with hindsight we can see this has been a period of make-believe.

An economic and investment purple patch made possible by credit creation on a scale never before seen.

The US’ $20 trillion economy is supporting a US$80 trillion debt load…$4 of debt to every $1 of economic output. Unproductive debt is a cancer that’s eating away at the economic body.

The following chart on real wealth versus paper wealth is a little dated. However, it serves to highlight (again) a disconnect with reality in 1980.

The Growth of The Credit Bubble

Source: Mike Roscoe

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The dotted purple line is the volume (billion tons per annum) of total global raw material extractions.

The red line is the value (in US dollars) of global GDP (economic activity).

Prior to 1980, the two lines closely correlate with each other.

Everything we use in this world is traced back to commodities. The desk we sit at, the chair we sit on, the TV we watch, electricity, food, motor vehicles, ships, trains, petrol, clothing and the list goes on and on.

Therefore, it’s reasonable to assume economic activity (GDP) should be linked to our usage of raw materials.

But since 1980, there’s been a disconnect between what we extract, and the activity generated.

The abandonment of the gold standard in 1971 put in place the ability for the one thing that CANNOT be sourced to a commodity…printing money from thin air.

Money creation and fractional banking sowed the seeds for the financialisation of the global economy.

Institutions that are deemed ‘too big to fail’ tells you how successful this process has been.

The ‘wealth’ hot-air balloon has floated higher and higher. Terra firma (the earth and its raw materials) is becoming a distant speck.

Derivatives. Swaps. SPACs. LBOs. CFDs. Home equity loans. Lo Doc lending. Negative yielding bonds.

These are the wealth creation vehicles of the 21st century…but they are all artificial. They only have value while people, in sufficient numbers, buy (or more to the point, borrow) into the illusion.

Icarus learnt a painful lesson in gravity when he flew too close to the sun.

My guess is the same fate awaits the wealth balloon — filled with the hot air of central bankers, politicians and ‘too big to fail’ banks.

The atmospheric pressure at higher altitudes is vastly different to those on Earth.

These altered and very dangerous conditions are why previous wealth balloons (debt crises) have all ended with a bang.

But none of these previous balloons ever flew so high for so long.

The thud back to earth will make a laughing stock of those who predicted the balloon can float higher and higher forever.

Unfortunately, Earth’s gravitational pull will also be a financial disaster on an epic scale for those who failed to apply a degree of common sense on the sustainability of this artificial wealth.

When this happens, one of the questions that’ll be asked in the cold light of day will be…

What have we done to ourselves and the following generations?


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.

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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