Blaming Everything but the Household Debt

If you can’t dazzle them with brilliance, baffle them with bulls**t.’

WC Fields

WC Fields was an American comic. While he may have said these words in jest, there’s a whole lot of truth in them.

The commentary around this week’s inflation number baffled me.

The economic elite expressed disappointment in the CPI not being higher.

A MarketWatch article titled ‘Australian inflation rebound falls short’ was indicative of the sentiment being expressed in the financial media.

The following is an edited extract (emphasis mine):

While a surge in electricity prices had been flagged by economists as possibly sparking renewed momentum in inflation ahead of the data, sharper falls in vegetable prices resulted in a 0.6% rise in consumer prices on quarter and a 1.8% gain from a year earlier.

Some economists see little on the horizon to nudge inflation back into the central bank’s 2%–3% target range…

With inflation continuing to disappoint expectations, fears are growing that Australia has entered a period of entrenched low prices, with wages growth showing no sign of a rebound.

With structural forces biting, and wages growth at record lows, inflation could remain bottled, economists warn.

Let me see if I’ve got this right.

Paying more for our electricity was the spark economists were flagging for renewed momentum in inflation. If only we’d paid more for our veggies, inflation would have been off to the races… Damn those veggies.

Let’s follow this line of reasoning.

The economic commentariat, would be happy if we — the households of Australia — paid more at the checkout and for power bills.  Why not throw in paying more for childcare or a drink at the local?

If we all paid more, we would not have the situation of ‘inflation continuing to disappoint expectations’.

And whose expectations might they be?

They certainly aren’t mine. And I suspect they aren’t yours, either.

What’s the matter with a period of entrenched low prices?

Who doesn’t want lower prices?

Would they rather we enter a period of higher prices?

The economic elite dangle the carrot of higher wages to offset higher prices.

Yet what about bracket creep? The taxman taking a greater share of your higher income makes ‘this dog chasing its tail’ exercise a complete nonsense.

Inflation is a construct of central banks. Indoctrinating generations of economists in the wonders of inflation is why this patently ridiculous idea of systematic erosion of buying power is taken so seriously.

To counter the claim of conspiracy theorist, look at these two bios (courtesy of Wikipedia):

Janet Yellen was an assistant professor at Harvard in 1971–76, an economist with the Federal Reserve Board of Governors in 1977–78 and a lecturer at The London School of Economics and Political Science in 1978–80. Beginning in 1980, Yellen conducted research at the Haas School and taught macroeconomics to full-time and part-time MBA and undergraduate students.

And:

Ben Bernanke taught at the Stanford Graduate School of Business from 1979 until 1985, was a visiting professor at New York University and went on to become a tenured professor at Princeton University in the Department of Economics. He chaired that department from 1996 until September 2002, when he went on public service leave. He resigned his position at Princeton July 1, 2005.

Bernanke served as a member of the Board of Governors of the Federal Reserve System from 2002 to 2005.

Yellen and Bernanke have never left the world of theory. There’s not a day of real-life commercial experience between the two of them.

What do you think they taught their students?

The bulls**t on the economic merits of eroding the value of a dollar.

Inflation is great for debt and lousy for savings. In the short-to-medium term, how do you grow an economy quickly — with debt or savings?

Debt. That’s why they love inflation. It creates the illusion of growth. Which leads me to an even bigger exercise in BS…our unprecedented recession-free run. 

According to The Australian on 13 October 2017 (emphasis mine):

The statistics show that the average OECD economy has a recession every nine years. Australia’s 26 years of continuous growth is improbable….

Good economic management has also played a role. An independent central bank with a mandate to flexibly target inflation has proved to be an appropriate institutional arrangement for a medium-sized commodity producer. The RBA has adeptly managed the cycle, maintaining target inflation and financial stability and deserves credit for the long boom.

Adept management?

Really?

Here’s that so-called ‘adept management’ in two charts.

This…

interest rate


Source: Trading Economics
[Click to enlarge]

…led to this (click here for a clearer picture):

debt history


Source: Australian Debt Clock
[Click to enlarge]

The RBA’s ‘adept management’ consisted of lowering interest rates to make debt more affordable.

And you need a PhD to do this?

Here’s what the RBA can take credit for…

A selection of headlines in The Australian from 15–26 October:

‘IMF warning to Australia over rapidly growing debt’

‘Debts have risen faster over the past decade in Australia’

‘Housing affordability worsens: Moody’s’

‘Treasury warns of housing dangers’

Our record breaking recession-free run has been nothing more than a debt-a-thon.

But we’ve seen this ‘Economic Miracle’ movie before.

The Japan Times published the findings of its autopsy on Japan’s 1980s economic miracle.

The article was titled: ‘Japan’s Bubble Economy: Lessons from when the bubble burst’.

Here’s an extract…see if anything looks familiar:

Economic historians usually date the beginning of the bubble economy in September 1985, when Japan and five other nations signed the Plaza Accord in New York.

The Bank of Japan had lowered interest rates from 5 percent in 1985 to 2.5 percent by early 1987.

The [Japanese] banks began freely lending to Japanese firms and individuals, who purchased real estate, which increased the paper value of land assets. This created a vicious cycle in which land was used as collateral to obtain further loans, which were then used to speculate on the stock market or to purchase more land. This drove up the paper value of land further, while the banks continued to grant loans based on the overvalued land as collateral.

Making money cheaper led to a debt frenzy that drove up real estate prices.

Who’d have thunk that possible?

Perhaps it was a one-off?

Well…no.

Remember the Celtic Tiger that turned into a pussycat? Let me refresh your mind.

Note that this article was published in October 2007…before the GFC hit.

Ireland’s economic miracle: What is “The Celtic Tiger”?

Ireland, 1950s, [was] a decade of economic stagnation, high unemployment and mass emigration. The situation was not going to improve much more over the next 30 years.

That situation changed dramatically during the 1990s when Ireland achieved a remarkable rate of economic growth: from 1990 to 1995 Ireland’s economy grew at an average rate of 5.14% per year, and from 1996 through 2000 it increased at an average rate of 9.66%. By the end of the decade, unemployment went down to a 4.5% and the nation’s GDP per capita stood at $25,500, higher than both the United Kingdom at $22,300, and Europe’s Powerhouse Germany at $23,500. During a little over a decade, Ireland was transformed from one of the poorest countries in Europe to one of the EU’s richest countries.

Let me interrupt the story there to emphasise that last sentence (remember what I said earlier about the fastest way to achieve economic growth in the short-to-medium term).

Before resuming the story — please bear in mind that this was prior to the GFC. The journalist was asking and then answering: How did this miracle happen?

10 root causes of The Celtic Tiger

The Celtic Tiger has been explained through many factors: low corporate taxes, low wages, US economic boom, foreign investment, stable national economy, adequate budget policies, EU membership, and EU subsidies. Economists are still debating about the relative importance of each of those factors. The debate about the causes of the Celtic Tiger is open and will probably last for decades. However, the fact is that all those factors have interacted, to one extent or another, to produce Ireland’s exceptional economic performance.

No mention anywhere of the role that debt played in this remarkable economic transformation. Not a peep.

Well, as it turned out, the debate did not last for decades. Within 12months, the real root cause was identified.

The following chart — courtesy of the OECD — plots ‘Household Debt’ levels for the three miracle economies of modern times.

Ireland (red). Japan (purple). Australia (blue).

household debt


Source: OECD
[Click to enlarge]

The red line tells the story of how the Celtic Tiger became a pussycat.

Since Japan’s economic bubble busted in 1990, household debt has remained relatively static. The economic malaise experienced by Japan in recent decades is a product of the private sector being unwilling to go deeper into debt.

Then we have Australia…slowly closing in on Ireland’s peak household debt level.

Have you read any mainstream commentary identifying our world record household debt as the root cause of our economic miracle?

I haven’t.

Instead we’re dazzled with the brilliance of ‘adept management’ and ‘flexible inflation targets’.

The citizens of Japan and Ireland were fed similar BS, and we know how that turned out.

If WC Fields was with us today, he’d being having a good old laugh.

Unfortunately, for those who believe this BS, they’re not going to see the funny side of it.

To avoid being baffled by the BS, please click here.

All the best,

Vern Gowdie,
Editor, The Gowdie Letter


Vern Gowdie 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 recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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