The Danger of Unquestioned Beliefs

Could you sacrifice a child to appease the gods?

From The Daily Mail:

Carthaginian parents ritually sacrificed young children as an offering to the gods and laid them to rest in special infant burial grounds, according to a team of international researchers.

An Oxford University professor said that [Carthaginian] people might have sacrificed their children out of profound religious piety, or a sense that the good the sacrifice could bring the family or community as a whole outweighed the life of the child.

In the context of modern society, this appeasement to the gods is incomprehensible.

What this extreme example demonstrates is the power of belief systems. Stories passed on from generation to generation perpetuate and reinforce beliefs…no matter how barbaric or bizarre it might be with centuries of hindsight.

Throughout history, belief systems gain traction and are invariably proven to be based on false premises.

The Earth is flat…

Leeches could cure ailments from tonsillitis to hemorrhoids…

Belief systems exist while people…well, believe.

When probing questions are met with the response of ‘because that’s the way it is’, doubt creeps in. At that point, belief systems start living on borrowed time.

As this Huffington Post article suggests, religion, the most enduring of belief systems, is also being challenged (emphasis mine):

An ongoing spate of recent studies — looking at various countries around the world — all show the same thing: religion is in decline. From Scandinavia to South America, and from Vancouver to Seoul, the world is experiencing an unprecedented wave of secularization. Indeed, as a recent National Geographic report confirms, the world’s newest religion is: No Religion.

Questioning the existence of god was once considered heresy…punishable by death.

How the tables have turned.

Today, the question is asked openly, and it is religion that’s fighting for its survival.

When it comes to belief systems, once the curtain is drawn and the Wizard of Oz is revealed, the illusion is shattered. People no longer believe.

Belief in central banker ability to manage an economy and manipulate markets remains largely unquestioned. The press dedicates airtime and column space to every utterance from the Fed chair or RBA governor. Even a thought bubble on where Australian interest rates might be in a couple of years is enough to strengthen the Aussie dollar.

The Fed was ushered into existence in 1913…at the behest of a powerful banking cartel.

What do we have to show for this century of meddling with economic settings?

Here’s the verdict from the Bank for International Settlements (BIS) — often referred to as ‘the banker to the central bankers’ — courtesy of The Telegraph:

The global economy is caught in a permanent trap of boom-bust financial cycles, a deformed structure becoming ever more corrosive and dangerous as debt ratios rise to nosebleed levels, the world’s top monetary watchdog has warned.

The Bank for International Settlements said the rot in the global monetary system has not been cut out since the Lehman crisis in 2008. The current, now ageing cycle could finish in much the same explosive way, contrary to the widespread belief that the financial crisis of 2008 was a once-in-a-century event caused by speculators.

Could an assessment be more damning?

Yet, we, as a society, take these incompetent charlatans seriously. Believing they know what they’re doing.

After the events of 2008/09, Alan Greenspan, Ben Bernanke and Janet Yellen all confessed to being caught off-guard. None of them saw the risks building in the system.

Surely, admitting to this gross dereliction of duty warranted a shattering of the illusion? No.

The media still fawns over these economic quacks.

My guess is that it’s going to take an even greater crisis to shatter the belief in central banks.

This will result in a great deal of money being sacrificed by those who worshipped at the altar of these false economic gods.

Another central banker myth that goes unchallenged is that inflation is good for the economy.


A targeted inflation rate of 2% reduces the buying power of $1 today to 98 cents next year and 96 cents the year after that. And on and on it goes, until the $1 is virtually worthless.

How is this systematic erosion of wealth good for you and me?

It’s not.

Decades of conditioning have created a belief system in a targeted-inflation policy.

Rarely is the blatant stupidity of this sanctioned wealth-destruction ever questioned.

In my book, How Much Bull Can Investors Bear? I raise the question. There’s a very real prospect of deflation — the central bankers’ devil — in our future.

This is an edited extract from the book:

Since the 1930s, the word deflation rarely entered our economic vocabulary. Inflation was everywhere and anywhere for so long that we reference graphs as ‘inflationadjusted’ or speak in “real (after inflation)” terms.

While inflation appears to be an ever-present force, history shows us that has not always been the case.

US Inflation
Source: The Wall Street Journal
[Click to open in a new window]

The defining line in this chart is when the US Federal Reserve was established in December 1913. Prior to the establishment of the Fed, the US economy experienced wild swings between inflation and deflation. Markets forces without central bank interventions were at work…correcting the excesses in both directions.

It took two World Wars and a Great Depression before the Fed eventually steadied the economic ship. From 1945 onwards it’s been an inflationonly economy, courtesy of a multi-decade expansion of debt, money supply and population growth.

For the past 30 years (since the mid-1980s) we’ve been conditioned to a steady rate of inflation…hovering between 2–5%. After a century of central banks tinkering with the economy, we now have targeted rates of inflation…

‘…The prospect of deflation has seriously upset the economic applecart. Society has been indoctrinated and conditioned to believe inflation is a positive.

Yet, when I ask anyone,What’s so positive about prices going up by 2–3% each year?”, they can’t answer me…or at least not with a plausible response. Replies consisting of “because it is” hardly qualify as an informed opinion.

Governments want inflation because it creates the illusion of growth, enables greater levels of debt and generates more tax revenues from rising prices and wages.

People with debt want inflation.

The Australian government, with a debt approaching $500 billion, definitely (and desperately) wants inflation.

But will inflation come, or are we destined for a sustained period of deflation?…

‘…The answer to the question on inflation or deflation has a huge bearing on where you position your wealth in the coming years.

The Great Credit Expansion was primarily driven by baby boomer households leveraging up to invest and consume. The injection of this additional money into the system created economic growth and inflation.

Based on the physics of “for every action there is an equal and opposite reaction”, my theory is that the Great Credit Expansion is now being followed by the Great Credit Contraction.

Households (except in Australia) are slowing down on the uptake of debt. Boomers are focused on saving for retirement and paying down debts. They are not too keen to take on debt (at least not in the quantities they used to) for consumption purposes.

My theory of the Great Credit Contraction is based on the trend of the 3Ds: debt, deleveraging and demographics leading to the 1D: deflation. When I published this theory a few years ago, it was completely at odds with what we had experienced since 1950…inflation was a given.

The following chart shows you the demographic headwind the global economy is facing in the coming years.

working age population
Source: Value Walk
[Click to open in a new window]

The productive sector those of working age is clearly in decline. The impact of this decline is incremental…slow at first, then picking up pace as the trend sets in.

As we outlined in Chapter 4, you have to look at the dynamics at play in the global economy to determine the best strategy for the future, not the past.

From 1970 to 2005 the working age population (fuelled by baby boomers) was in the ascendency. The combination of boomers and credit expansion (via fractional banking) led to an economic bonanza that lasted for more than three decades.

A trend of that duration tends to establish belief systems shares deliver long term superior returns, property values generally rise, wages increase annually, handouts are now termed “entitlements”, and cash in the bank is idle money.

But what if, with the impending decline in the working age population, we see those beliefs challenged? What if the expansionary forces of the past become contractionary, and inflation is replaced by deflation?

Shares may deliver inferior returns. Property values would come under pressure as people question the merits of borrowing large amounts of money. Entitlements are pared back as government revenues stagnate or fall. Cash would become king.

That’s a world that’s completely alien to us…even me. However, this is what the Japanese have been living with since 1990. And it’s what Krugman and co. are worried about.

The RBA reducing rates to 1.5% is an indication of the squeeze coming from the global forces of contraction…

‘…We’re in a world where we have an oversupply of cheap labour, mines, factories and transportation. We’re over-indebted. We’ve overpromised on entitlements. We are living longer. And we are on the cusp of an automation revolution…driving labour rates and production costs even lower.

These are major structural issues that are not going to be cured by lower (accommodative) interest rates. In fact, lower rates are only going to add to the deflationary pressures.

Retirees will earn less and, therefore, spend less. Businesses will take advantage of the low rates to invest in automation and robotics. Workers, unsure about their employment prospects, and with suffering wage stagnation, will be less inclined to borrow…no matter how low rates are…

‘…My best guess at this stage is that deflation will continue to exert its influence on all major economies. This is most definitely not what the authorities or the investment industry (led by Wall Street) want.

Which is why we have to expect ‘helicopter money’ despite the protestations to the contrary from the central bankers to become an officially endorsed deflation fighting strategy.

The problem with dropping money into the bank accounts of both governments and people is twofold: How much is enough, and when do you stop?

The policy of “helicopter money”, or “peoples QE”, will only be invoked as a measure of desperation…when deflation has a firm grip on the global economy.

Therefore, those worried about inflation are looking to the horizon, and not what’s immediately in front of them…the deflationary cliff. If, in all probability, we are to endure a period of deflation before the authorities’ resort to the ultimate act of monetary madness, then cash is the preferred asset class.

The central bankers would have us believe our banks are stronger, the economy is growing, and that everything is under control.

If history has taught us one thing, it’s that nothing is more hazardous to your wealth than an unquestioned belief in reassurances given by a central banker.

Since 2008, the world is much deeper in debt, and assets are at record price levels.

We are living in a very dangerous world. One that’s on the cusp of destroying widely-held beliefs in how markets and the economy function.

Failure to think for yourself could result in your capital being sacrificed.


Vern Gowdie,
Editor, Markets & Money

Editor’s Note: Vern’s book, How Much Bull Can Investors Bear? is a must-read for any investor hoping to protecting their wealth from the coming crash. You can learn how to access Vern’s book by clicking here.

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:

To read more insights by Vern check out the articles below.

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