More Debt at the First Sign of an Interest Rate Cut?

Interest rates are at record lows. They’re probably going to be at record lows for a long time. So I say: “Have a go.”’

Joe Hockey, 6 March 2015

‘Economic activity does not appear to have responded to the stimulatory monetary condition in the way that occurred in the past and inflation rates have been very low.’

RBA Deputy Governor Dr Philip Lowe

Since the Second World War the mug punters — you, me and the generation or two above us — have acted like Pavlov’s dog and jumped at the chance to borrow more money whenever the benevolent RBA has made the cost of that money cheaper. Our apparent willingness to go deeper into debt at the first sign of an interest rate cut is an essential component of central bank economic models.

Failing to act in such a predictable manner is not supposed to happen.

Even ‘smokin Joe’ is out beating the debt for growth drum, telling the business sector money has never been cheaper, so ‘have a go’.

Folks, we may be on the cusp of history.

For over six decades, the world has grown ‘richer’ from its willingness to take on debt in all its forms. The comments from Lowe and Hockey indicate the economic model the world has operated under for the past six decades may possibly be in its final stages. Economic theory may soon encounter a Great Depression style reality.

Central banks have used interest rates (the cost of debt) as an accelerator or brake on the global debt vehicle. Economy too slow? Lower rates, and the engine roars back to life. Conversely, if the economy gets a little carried away, raise interest rates to slow things down.

In 25 years, we have witnessed both ends of the interest rate spectrum. In 1990 — the recession we ‘had to have’ — interest rates reached the high teens to slow down an overheating economy. Whereas today, interest rates are at historic lows to encourage people to borrow and for savers to spend their hard earned. RBA Deputy Governor Dr Philip Lowe admitted this when he said ‘…one of the ways monetary policy [lower interest rates] worked was by encouraging people to bring forward spending, either by borrowing or drawing on their savings.

But there is only so much water a sponge can absorb. Australian households, on average, are awash with debt from these previous periods of ‘encouragement’. They simply cannot absorb debt to the same extent they did in the past.

The generation responsible for creating the greatest debt binge in history — the baby boomers —have changed their priorities. Savings and debt reduction rank well above credit funded consumption. As a boomer myself, I’ve lost count of how many of my family and friends have told me they are focussed on getting their financial house in order.

I firmly believe the RBA Deputy Governor and our Treasurer do not realise the admission they have made in their public statements.

They have openly acknowledged economic growth is reliant upon ever-increasing levels of debt.

In essence, the global economy is a giant Ponzi scheme. The system (scheme) relies on ever increasing amounts of ‘new money’ to keep the growth illusion going.

Without mug punters taking on more debts (created from printing presses and fractional reserve banking) the system starts to fail. All those government promises, funded from a system totally reliant on debt for growth, start to unravel.

The biggest winner of a debt dependent economic model has been the financial sector. The combined value of the Big Four banks is a staggering $455 billion. To put this figure into context, the four banks account for 30% of the entire value of the Australian share market. The RBA and Treasury rallying call for ‘more debt’ would be music to the bankers’ ears.

When debt is being endorsed and encouraged by the pillars of society — RBA, Treasury and the financial institutions — you can understand why mainstream is both deaf and blind to the real message of ‘please, please, please keep the Ponzi scheme going’.

These ‘respected’ institutions have an agenda…to keep you in debt, because more debt equals more growth.

Hockey is at pains to tell us (and rightly so) the government has to live within its means and pay down debt. Yet, he tells the private sector to ‘have a go’. Sounds like, looks like and smells like a definite case of ‘do as I say, not as I do’.

The GFC was meant to be the wake-up call on the perils of excessive debt accumulation. The financial system came oh-so close to imploding.

Rather than sit bolt upright and respond responsibly to the wake-up call, the authorities hit the snooze button. Over the past six years, massive levels of stimulus around the world have created the illusion that everything is under control. A return to the ‘old normal’ is only another interest rate cut or printed dollar away.

Since the GFC, global debt (according to McKinsey & Co) has increased from US$142 trillion to US$199 trillion. Economic ‘stability’ has come with the price tag of US$57 trillion. What a bargain.

It took at least a century for global debt levels to reach US$142 trillion, but we added another US$57 trillion in six years.

The global Ponzi scheme has grown so large that its appetite is no longer satisfied with dollars measured in the mere millions or billions. It needs trillions to keep it functioning.

The actions of central bankers conform to Einstein’s definition of insanity of doing the same thing but expecting a different outcome. Yet what appears to me to be obvious madness continues to pass for rational economic management.

The universe is, at times, a very patient teacher. It gives us frequent warnings to modify our behaviour. Failure to learn the lesson leads to another warning…one with a little more intensity.

The GFC was the universe saying ‘enough is enough with this whole debt dependency growth model’. How did our so-called ‘leaders’ respond? They told the universe to shove it.

Bad move.

The intensity of the next warning is going to be devastating. Central bankers have nothing left to fight the next crisis. Interest rates can’t go lower, and printing even more money will be useless. The universe will extract its revenge, and society is going to be taught a very painful lesson about the perils of ‘bringing forward spending’before you have earned the money.

Only a mug would ‘have a go’ and borrow money in a world that, thanks to the actions of central bankers, is far more unstable then it was six years ago.

Hava a go, ya mug.

Vern Gowdie,
Editor, Gowdie Family Wealth

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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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