Some relative calm has been restored to global share markets. Green ink has temporarily replaced red ink. Apparently this was the correction we had to have. Buy-the-dip is still the prevailing mentality.
Has the crisis been averted? No. Just biding its time. The market is the cat and the investors are the mice.
We have a global economy geared (literally) for growth, in a world where demand is contracting.
The pressure of these two forces are opening up all sorts of cracks. What’s China’s solution to the economic funk? Lower interest rates and reduce bank reserve ratio. Why? To encourage more borrowing. The central bank cure for everything…more debt.
We are on the highway to hell, with Yellen and co. in the driver’s seat pressing down even harder on the accelerator. Something must break, and unfortunately it’s not going to be the will of central bankers. Therefore, the system will break.
Supposedly with age we are meant to gain wisdom. If this is true, why is it all these grey haired policymakers refuse to learn from history?
‘The 1920s were an age of dramatic social and political change. For the first time, more Americans lived in cities than on farms. The nation’s total wealth more than doubled between 1920 and 1929, and this economic growth swept many Americans into an affluent but unfamiliar “consumer society.” People from coast to coast bought the same goods (thanks to nationwide advertising and the spread of chain stores), listened to the same music, did the same dances and even used the same slang!’
What followed was two decades of economic and social upheaval. The imbalances had to be corrected. Prosperity borne from productivity once again returned in the 1950s.
The Dow Jones finally surpassed its 1929 high, a full 26 years later, in 1955.
The current period of credit excess has lasted over three decades. If you believe in the theory of ‘for every action there is an equal and opposite reaction,’ then what period of retribution does the market have in store for us?
What we’ve seen on markets in the past week will be a footnote in the history books. The real story is yet to come. The recent action is a warning sign for sure, but not one that many will take heed of.
My neighbour, a retired businessman with an economics degree and a Markets and Money reader, said to me last night, ‘You must be happy?’
My reply was ‘Yes and no.’
‘What do you mean? This looks like what you have been warning me about.’ he said.
‘Yes, it does have that beginning of the end type feel,’ I replied.
‘Then why the mixed feelings?’
‘Because if I’m right, then a lot of Australians are going to be hurt…my family and friends included.’
‘Oh I never thought of that,’ was his reply
I then told him about a conversation I had earlier in the day with Mary (not her real name) who owns the local coffee shop.
Mary is the nicest person on this earth. She just makes your day brighter. Great coffee always served with a smile, and never a bad word about anyone. Mary is married to Joe (not his real name). Joe has his own one-man business. They are in their early 40s and have no children.
They are not Markets and Money readers.
Over the years Mary has told me a little about her financial situation — mortgage, business loans, credit card debt (to pay for a $20k overseas holiday) and a car loan have all been bundled into a home equity loan. Lower interest rates have made their debt dollar stretch further.
Yesterday Mary told me Joe ‘surprised’ her with a brand new Harley. She then confessed, ‘We don’t have the money for it, but the Harley dealer was offering such a good finance package at just 4%, Joe couldn’t resist’. Of course new accessories (helmets, leathers) are needed. These went on the plastic.
Given that Australian household debt is amongst the highest in the world, I suspect Joe and Mary’s financial position is not uncommon.
The reason for this dubious honour is it has been 25 years since we’ve heard these words:
‘The first thing to say is, the accounts do show that Australia is in a recession. The most important thing about that is that this is a recession that Australia had to have.’
Treasurer Paul Keating November 1990.
Back then, Joe and Mary were carefree teenagers.
Anyone under 50 has only ever experienced an economy that delivers continual growth (albeit at varying rates). This is their reality. But it is not the truth. Economies do have a dark side. We just haven’t seen it yet.
China’s single minded pursuit of growth has been an economic boon for Australia. We have indeed been the Lucky Country.
However too much good luck actually leads to bad luck. Complacency breeds contempt. Stability creates instability. Households, encouraged by the RBA reducing interest rates, go further into debt. They believe tomorrow will be as prosperous as yesterday and today. Households have no other reference point. Those trusted pillars of society, Government and banks, aren’t telling them anything to the contrary. And why would they? They run this giant Ponzi scheme.
My first book, A Parents Gift of Knowledge, was written to my daughters in 2011. I wanted to share with them what I had learned about life and money. For what it was worth, my knowledge would be my legacy to them.
My second book The End of Australia has been written with the Joes and Marys of Australia in mind.
While we see graphs showing debt levels moving ever higher, each dot point on the graph represent millions of Joes and Marys. People who have bought into the central bankers grand plan of never-ending growth…borrow, borrow and borrow some more.
Society has been seduced by lower interest rates and higher lifestyles.
Hopefully some people will heed the warnings in the book. The great Aussie refrain of ‘she’ll be right’ won’t pay the bills or save your capital when the debt supercycle moves into the default phase.
This extract from the book was written with the Joes and Marys in mind. Trying to forewarn them of what is to come:
‘The prospect of our “lucky country” entering a prolonged period of extreme hardship — or Long Bust — gives me no joy. However, the facts are what they are.
‘No amount of wishing it could be different will change the facts…imbalances, unfortunately, must be corrected.
‘An attitude of “she’ll be right” may assist in providing us with a coping mechanism…putting on a brave face amidst a world of turmoil.
‘But behind closed doors, the brave face will give way to the inner demons of:
- Is my job safe?
- How will we cope on one wage?
- Will I ever find employment again?
- Will we be able to keep our house?
- Why did we borrow to buy that second property?
- How much more will my superannuation lose?
- Are we going to be able to keep the business open?
- Can we afford to keep the children in private education?
- Will there be a job for me after uni?
- Will we be able to retire?
- What if the government cuts back on the age pension?
‘These are questions framed by fear…the fear of losing lifestyle, assets, employment, business and entitlements.
This picture from The Great Depression tells us the fate that awaits those who believed they could live beyond their means indefinitely.
Editor, Markets and Money, Australia
Publisher’s Note: This week we’re running a series of short three-minute videos on Facebook, where I (Kris Sayce) ask Vern about his views on the world economy, and especially what it means for Australia. After four decades or more of almost unlimited credit growth, Vern says that the Australian economy in particular is heading for a major shock. Go here to watch these critical videos now.