The End of the Age of Excess in this Debt Blown Economy

The Dow surged to a new high on Friday after Bank of Japan Governor Haruhiko Kuroda announced even more ex-nihilo yen is to be added to the Japanese economy.

More free money for markets was enough for investors to ignore the fact that personal spending in the US fell 0.2% in September (the first fall this year) and US labour costs moved up 0.7% for the July to September quarter.

You’d think slightly weaker sales, combined with increased wage costs, would cause concern about earnings. But no. Not in this age of excess. Ever heard of the LiftSeat 600? Probably not.

The LiftSeat 600 is a motorised toilet that lowers and raises a person, weighing up to 600 pounds (270 kilos), on the loo. But wait, there’s more. The manufacturer is working on the LiftSeat 750 — you guessed it, this one is for people weighing up to 750 pounds (340 kilos).

I can hear you saying ‘what on God’s little green earth does a hydraulic dunny lifter have to do with financial matters?’ The LiftSeat 600 is a (extreme) by-product of the age of excess. Too much calorie consumption has created a need for motorised assistance to do number ones and twos.

For over forty years, Western society has been conditioned to expect more. Not only expect, but we feel entitled to more. And when more is delivered, we demand even more.

Eat more unhealthy food. No worries. The government provides us with free medicare and access to heavily subsidised medication courtesy of the Pharmaceutical Benefits Scheme. We are entitled to access someone else’s tax dollars because we cannot exercise control. Sound unfair? That’s the world we live in.

US investment banks couldn’t shove enough subprime loans down the throats of the gullible borrowers. Everyone wanted more — the bankers, the borrowers, the realtors, the builders, the investors and the government.

When the system crashed under the weight of subprime debt, what happened?

Did the bankers suffer? Not in the world of excess and entitlement.

Instead, the government gave them a LiftEasy 4 trillion and LiftEasy ZIRP. The taxpayer paid, of course .

Why were QE and ZIRP necessary in the first place? Surely, the bankers deserved to be punished for their sins? Not in the world of more. We got bucket loads of stimulus because we’ve built a global economy heavily skewed towards consumption…credit funded. Banks are a key link in the debt chain.

It’s this economic model of excess that gave us the dictum ‘we buy things we don’t need with money we don’t have to impress people we don’t know.’

Walk through any shopping centre and you have to wonder how all these retailers came into existence.

There are only so many clothes, handbags, shoes, sporting goods and electronic gadgets we need. The proliferation of garage sales is another indication of our world of excess.

As a kid growing up in the 1960s, I cannot recall ever seeing a sign for a garage sale. And if you had of seen one, you would have wondered why someone was selling their garage?
Households made do and waste was not tolerated…at least, that’s how it was in our home. Households tended to live within their means.

Nixon’s abolition of the gold standard on August 15, 1971, fired the starting gun of the world of excess we find ourselves in today.

Freed from any form of accountability, the US embarked on a period of sustained money creation that flowed to all parts of the developed world. Decade after decade (private and public) debt levels steadily increased. More money. More credit. More consumption. More welfare promises.

The world as we know it has been built on the concept of ‘more’.

‘Growth’ (another word for ‘more’) is the constant refrain we hear from politicians, central bankers and CEOs of listed companies. We need to grow the economy. We need to grow profits.

What happens when the global population stops growing or if society decides there’s more to life than wanton consumption…what happens when households start living within their means? You cannot force growth. Ah, but the central bankers can fake it…for a while.

This is what QE has been about. Underwriting government deficit spending (money that, when injected into the economy via various government spending programs, forms part of the GDP figures) and providing investment banks access to an abundance of free money to inflate asset prices to create the illusion all is well in the economy.

Last week, the Fed turned off the printing presses to see if the economy (and more importantly, the market) can stand on its own two feet.

Meanwhile, Europe and Japan are both battling the prospect of deflation. The ECB and BoJ won’t permit falling prices in a world addicted to growth. They will go all in with their own versions of QE to beat deflation.

The Fed too will keep interest rates at near zero well beyond their stated timeframe.

Whether the printing presses in Washington remain idle for very long is a 50/50 bet. If markets fall hard, it’s unlikely the US central bank will have the nerve to stand back and let the cards fall. Intervention is mandatory in the world of more.

In the coming years, we are going to learn what the ultimate price for this extended period of excess is going to be. It’s a price the vast majority are unprepared for.

The central bankers’ exercise in ‘pretend and extend’ over the past six years has simply masked the debt malaise within our society.

Society is comfortably numb. A temporary peace has been bought with QE and interest rate suppression.

When the markets deliver their day of reckoning (and believe me they will) the world of more — more government funding, more property and share price increases, more credit — is over. The repercussions are going to be deep and long lasting.

In addition to being conditioned to expect more, we are also conditioned, as a society, to rarely accept responsibility for our actions. Blame is placed on our circumstances, our childhood or someone else. Not my fault is the default position.

In keeping with the predisposition to point fingers away from ourselves, you can expect central bankers to go from being deified to vilified in a very short space of time. The masses will cry ‘we were duped by their spin’. Let’s start a class action. Demand compensation from the government.

Forget it. The money tin is going to be empty.

The lessons from The Great Depression were seared into the consciousness of at least two generations. It’s evident from the age of excess those lessons have been well and truly forgotten. The teacher is getting ready.

The coming Greater Depression is going to be brutal. I do not say this to be sensationalist or to create unnecessary fear. Life is all about balance — high tide, low tide; night followed by day; droughts broken by floods; yin and yang. This is the order of the universe.

Excesses are corrected.

The period of excess we have lived through has been a full blown orgy of debt. By comparison, the Roaring Twenties looks like a Sunday school picnic that got a little out of hand.

Based on the universe’s power to swing the pendulum in an equal and opposite direction, it stands to reason the corrective phase we are yet to experience will be more severe than anything we’ve ever encountered.

Governments will be forced to undertake the structural (taxation, welfare, employment laws, red tape, health) reform they should have done six years ago. While this reform is essential, it’ll create enormous upheaval in the lives of those who have believed the government had their backs.

Take the necessary precautions to ensure you have protected your financial position.

Reduce debt. Take profits. Build cash reserves. Look at your world through conservative eyes and see how you can live within your means.

I could be completely wrong. The universe may not correct this age of excess and LiftEasy 1000 could come off the production line in the near future.

However, being financially prudent is not such a bad thing…unless of course you’re a policymaker chasing growth.

Vern Gowdie+
For Markets and Money

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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