A Change in Climate Is Coming — Part Two

Today we continue the story on how our fixation with perpetual growth has sown the seeds for a future that’s going to be far more challenging than the past.

Since 1980, China’s competitive cost structure has exported low inflation to the world…

Inflation Consumer Prices

Source: World Bank

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Low inflation gave central banks the room to manoeuvre interest rates lower. Lower rates gave the world the capacity to borrow more…much more.

HOODWINKED! Why Australia’s ‘miracle’ economy is a farce

The more we could borrow, the more ‘cheap things’ we could buy from China…which, due to economies of scale, made the price of goods even cheaper.

Debt-funded demand led to debt-funded supply.

China geared up (literally) for production. More factories. More ships. More power plants. More housing.

The combination of cheap production and cheap debt resulted in…surprise, surprise…China pumping out more emissions.

The cosy commercial arrangement between ‘Eastern makers and Western takers’ created a self-feeding loop of low inflation.

Central banks thought they had discovered an economic Shangri-La. Above average GDP growth without runaway inflation. Pure genius.

But underneath it all, there were losers.

The manufacturing base in the developed countries went into decline. China not only exported low inflation, but also lower-wage costs.

Wages began stagnating for the first time in decades. Which, in turn, forced consumers to borrow to maintain living standards.

The trend in global debt moved into the exponential phase around the same time as China embarked on its economic reform…the early 1980s and 1990s.

Total Global Credit Market Debt Owed

Source: Market Cap

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Compare the pair…here’s the CO2 chart from yesterday’s Rum Rebellion:

Annual Total C02 Emissions

Source: Our World in Data

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Is it pure coincidence China’s emissions have risen in tandem with global debt levels (used primarily for consumption) AND emissions in the developed world have decreased as its manufacturing base shrank?

I don’t think it’s drawing too long of a bow to suggest there’s a link between these factors.

Which invites the question…

Is the debt-funded growth model the real environmental vandal?


But those wanting perpetual growth will never admit to it.

Imagine a world where consumers decide there’s more to life than buying things we don’t need, with money we don’t have, to impress people we don’t know?

In that world, eventually the factories stop producing as much stuff. The ships remain in port. Transportation — by air, road, and rail — slows down. Power stations are mothballed.

All these fossil fuel dependent links in the consumption supply chain suddenly stop emitting.

CO2 emissions fall.

Here’s how that make-believe world has played out in practice…

Australia's CO2 emissions to fall to two decade

Source: ABC News

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Curtailing economic activity is one proven way of reducing emissions.

However, as we’ve witnessed, government, businesses and individuals cannot afford for this to happen. Any tapping on the economic brakes causes much disruption to a world geared for growth.

So much has been promised to so many based on an ever-increasing quantity of debt fuelling the CO2-emitting perpetual growth machine.

Which leads us to…

The real great moral challenge of our generation

And you might be surprised to learn it’s neither debt nor climate change.

The real challenge we face is how to deal with the consequences of promises that can never be kept.

When the next credit crisis arrives…and with US$140 trillion more debt than in 2007, believe me, it will arrive…the illusion of perpetual growth will be shattered into a thousand pieces.

The collapse in debt levels — from defaults to deferred payment arrangements — will trigger another (more permanent) slowdown in the global supply chain.

Emission levels will fall in line with lower levels of Western demand.

Unfortunately, four decades of debt-fuelled consumption has created a world of make-believe in perpetual growth.

For perpetual growth to occur, it requires each successive generation to go even deeper into debt than the preceding generation…it’s a Ponzi scheme.

Demographics, sky-high debt levels and historically low interest rates all combine to tell us the base of this pyramid scheme is about as broad as it can get.

Government can broaden the debt base, but this is highly unproductive debt. Government wastes money on political quick fixes and funding unaffordable welfare schemes.

For an economy to achieve genuine growth, debt has to be productive.

Think of the promises that have been made on the nonsensical premise of perpetual growth.

Pensions — private and public. Healthcare. Households taking out massive mortgages on the premise house prices always rise. Businesses started (with debt) based on assumed growth. Retirement plans made on past returns (performance that was influenced by debt-funded growth).

The great moral challenge of our generation is how to deal with the social cost of promises not being kept — marriage breakdowns, business failures, suicides, mental health problems, community anger over job losses and closure of services.

We’ve created a system that’s seriously overpromised but cannot possibly deliver. The winding back of expectations is going to be extremely painful.

Climate change is coming…but not the one you think. The political climate is where the heat is going to be felt the most.

And it’s this political response we must watch closely.

Are we going to see the formal introduction of a universal wage, ‘helicopter money’ or another ‘knee-jerk’ inflationary package, or a combination of ‘harebrained’ policy responses or all of the above?

You bet.

The failure to recognise the global debt problem in 2007 has produced an environment that’s far more toxic and lethal to our community well-being than any coal-fired power stations could ever be.

A climate of hostility, disbelief and disappointment is going to herald a change in public attitude…a new frugal generation is in our future.

Ironically, it’s going to be this change in attitude, not renewable energy, that will lead to the greatest reduction in CO2 emissions.


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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