Debt Funded Growth Has a Finite Life… Even for China

Another week closer to the bigger picture coming into focus.

Populist politics is on the rise. Donald Trump continues to poll well. Bernie Sanders (the socialist Democrat) is giving Hillary a run for her money. In Spain, the left-leaning, anti-austerity Podemos Party is trying to form an alliance with the Socialist Party to form government.

Anti-immigration parties are gaining more traction in Europe.

Savvy political hopefuls are tapping into an undercurrent of discontent.

There appears to be a growing social mood against establishment beliefs and doctrines. When times are good society has a willingness to share. However if things tighten up, then the mood is one of ‘charity begins at home’.

The deflationary squeeze is on and social mood seems to be reflecting the hardship families are experiencing.

Denmark joins Sweden in announcing a temporary tightening of its borders. Greece is under pressure to make its borders less porous. With something like 20 million displaced persons making their way north from Africa and west from the Middle East, Europe is going to become even more divided. It will be every nation for themselves.

Diary, this week I read Michael Pettis’s excellent blog on ‘Will China’s new “supply-side” reforms help China?’

Pettis is the fellow who, a few years ago, stood in front of an audience of over-confident and indebted Australian miners and told them commodity prices would fall by more than 50%. How did he know this? Pettis is an economic and financial strategist based in Beijing. He had identified back then that China could not possibly maintain its growth momentum. Naturally the mining executives didn’t appreciate his dire (and as it turned out, accurate) prediction.

For me, the major takeaway from his latest blog was:

China’s most serious problem is “the relentless accumulation of debt”, and economic conditions will continue to deteriorate until Beijing directly addresses the debt. In fact it doesn’t really matter if China is able to report growth rates for another year or two of 7%, or 6%, or even 8%. If the only way it can do so is by allowing debt to grow two or three times as fast, there will have been no improvement at all, the economy will not have adjusted, and China’s longer-term outlook will be worse than ever.

Debt funded growth has a finite life…even for China.

Longer term China will be a much more advanced economy. But in the coming years it has to deal with the debt overhang from its recent stellar growth. We had best prepare for harder times ahead.

Diary, what did the world do to warrant Kevin Rudd being a serious contender for UN Secretary General candidate? At least Ban Ki-moon came across as somewhat humble. Perhaps in some perverse way the universe wants to give us one final symbol of hubris, self importance and egotism before it delivers its day of reckoning. The world does indeed work in mysterious ways.

Diary, right on cue Rugby League’s annual pre-season scandal hit the headlines his week.

In some way there’s a parallel between Rugby League’s latest embarrassment and the financial predicament the world finds itself in.

When you give a young man (with an excessive level of testosterone) too much money, too much time, too much adulation and too little education in social graces, there’s a pretty good chance things will end badly. The player involved in the latest scandal is a repeat offender. Lessons have obviously not been learned. So what happens? The stupidity goes to a whole new level and finally, people say enough is enough.

The simple message of ‘stay off the drink, you can’t handle it’ should have been heeded. But it wasn’t.

The same goes for a world that is addicted to debt. How many warnings do we need to have before we make complete fools of ourselves? The events of 2008/09 were meant to be our wakeup call — get off the debt drug or this stupidity will only magnify itself and end badly.

What happened? The lesson of 2008/09 was largely ignored. The debt binge has continued. Australian households owe far more than they did seven years ago. The Australian Government has a $400 billion debt pile that’s growing higher every day. Officially, public debt is meant to top out around $550 billion in a few years’ time. Fat chance. I can see our Government’s debt being at least $800 billion or more within five years.

Diary, it worries me that we (as a society) don’t see it coming. I talk to people from all walks of life and there’s no real recognition of the very real dangers ahead. Everyone can see how a young fellow with more money than sense can get himself into a good deal of trouble and should be taught a lesson. Yet they fail to see the same principle being applied to the world of credit.

It appears Huxley was right when he said, ‘That men do not learn very much from the lessons of history is the most important of all the lessons of history.

The problem as I see it stems from decades of conditioning (lives built on various forms of credit) AND the absence of a decent recession thanks largely to China going on a credit fuelled spending spree.

We’ve been Lucky. But, contrary to popular opinion too much good luck is not a good thing.

Diary, complacency has set in, I can just feel it. She’ll be right, no worries mate.

And finally Diary, we have The Australian of The Year being awarded to a retired military man who made a speech or two about gender inequality. Seriously that warrants being Australian of the Year?

Surely out of 24 million people there’s a nurse, (personally, I think nurses are one of the most under-rated professions – and no, there’s no-one in my family who’s a nurse) carer or a community volunteer that deserves official recognition for their selfless efforts?

We seem to get side-tracked or hijacked by these feel good minority issues and we either forget about or take for granted the people who, on a daily basis, create the bedrock our society is built upon. I have no doubt that I will offend some people saying this.

Dear diary, I think the coming shake out may be what we need to re-align our values.


Vern Gowdie

Editor, Markets and Money

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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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