Fantasy Island

Fantasy Island is a paradise in the Pacific Ocean.

Swaying palm trees. Crystal clear water. Pristine beaches.

It’s an egalitarian society. The island’s inhabiting 10 people are hard-working and productive…each generating an income of $50,000.

There is no debt.

The island’s GDP output (assuming the $50,000 of each person is passed through the economy once a year) is $500k.

One day, a fellow calling himself Charles arrived on the shores of Fantasy Island.

Charles’s arrival increased the population on Fantasy Island by ten percent.

Charles — who just happened to have $50k stashed in his suitcase — also added to the economic output (GDP) of Fantasy Island.

Twelve months after his arrival, Charles produced a chart showing that the island’s GDP had increased by 10 percent (from $500k to $550k)…thanks to Charles spending his $50k.

The island’s inhabitants were impressed…but in spite of this stellar economic performance, they didn’t actually feel any wealthier.

What Charles failed to show them was the GDP per capita number…it was still $50k per person. There was no real growth.

Charles then came up with an ingenious plan to double GDP…each person needed to borrow $50k and spend it.

Twelve months later, Charles proudly reported a 100% increase in GDP — from $500k to $1m — and this time the inhabitants did feel richer. They’d been on holidays. Upgraded motor vehicles. Bought new furniture. Put in swimming pools.

But their incomes were still $50k each and they found they now had another expense…the interest on the $50k loan. But this wasn’t too much in the first year.

To register another doubling of GDP the next year (going from $1m to $2m), Charles told them to each borrow $100k PLUS the interest on the debt. Taking the individual debt load to a little over $150k.

Charles’s grand stimulus plan continued for several more years.

Everyone felt prosperous.

A number of the previously industrious islanders no longer felt that work was necessary.

Charles had established an ‘entitlement’ fund…with borrowed dollars of course.

With debts of several hundreds of thousands of dollars each, the inhabitants of Fantasy Island found they were now using most of their income for debt servicing.

They no longer had the capacity to take on any further debt.

The economy on Fantasy Island shrank.

The foreign lenders came in and seized the assets. The inhabitants lost their homes and jobs.

When asked by the administrators, ‘Who established this seriously flawed system?

The islanders replied, ‘Charles.

Charles who?’ the administrators enquired.

Ponzi. Charles Ponzi. That’s his name.

Now, I know Fantasy Island is just a make-believe scenario, and nothing this ridiculous could ever happen in real life.

Who would possibly think you could borrow your way to economic ‘prosperity’ indefinitely?

What a ridiculous notion. Everyone knows that, at some point, the debt load and servicing costs must become too onerous to continue with this flawed strategy.

And what kind of bean counter would include debt in the GDP figures?

If you did this, wouldn’t you just be artificially inflating the numbers, masking the true economic output of the system?

And surely you’d also discount the number of any new inhabitants from the GDP numbers? How else could you provide an accurate picture on genuine output per person?

It stands to reason that including additional debt, and the growing population base, into the GDP numbers would make the data virtually meaningless.

Ok. Enough of the sarcasm…because, as we know, this is exactly what happens.

Headlines trumpet ‘GDP growth’, but the proclamations are fraudulent.

The data simply tricks people into believing our economic body is robust and healthy.

When, in reality, it’s arteries are clogged with debt cholesterol, and we’re just one small shock away from cardiac arrest.

On 6 June 2018, the ABC reported…

‘The Australian economy has beaten expectations, with very strong 1 per cent growth in the first quarter driving a 3.1 per cent annual increase in GDP.’

And why was that?

According to The Guardian on 12 June 2018…

‘Thanks to public spending — not private — the economy keeps ticking along.

‘The past two years have been a very good demonstration of the importance of the public sector in keeping the economy growing when the private sector is weak. Since the start of 2016, the public sector has almost been as vital to the economy as during the global financial crisis, and demonstrates yet again that governments do create jobs and economic growth.

‘Currently our GDP is growing in trend terms at 2.7% — nicely in line with the peaks of growth over the past six years. But once we take away the public sector’s contribution, the economy is only growing at 1.7% – below the peak periods of growth of the past half dozen years’

Thanks to public spending, our economy is ticking along.


Is that the same public spending that warranted this warning from the IMF in April 2018?

‘Australia’s government debt has risen faster since the global financial crisis than the debt of almost any other country, International Monetary Fund figures show.

‘The IMF is concerned that government debts around the world have improved little since the financial crisis and says it is urgent that countries make use of better economic conditions to cut budget deficits and pay down debt.

‘The mid-year budget update in December showed gross debt peaking at $591 billion in 2019-20, having hit $500bn in 2016-17. Gross debt stood at $319bn when the Coalition took office in 2013.’

The Australian on 19 April 2018

The IMF warns that Governments (including ours) need to exercise budget restraint…rein in debt…otherwise there could be trouble down the track.

On the other hand, we’re told to be ‘thankful’ our Government is going deeper into the red…picking up the slack from the private sector.

Based on that logic, we should be ever so thankful for every Treasurer we’ve had since that nasty Peter Costello…you remember him? He’s the one who paid down our debt.

And, boy oh boy, I’m especially thankful to be living in Queensland.

Our Treasurer has given us plenty to rejoice about in recent days.

According to The Australian Financial Review on 13 June 2018 (emphasis is mine) …

‘Fresh from being returned to government in November 2017, Queensland Labor has officially given up on seriously paying down any debt, something it promised prior to the 2014 and 2017 elections. Instead, new Treasurer Jackie Trad is relying on higher debt, a raft of new taxes and a Lucky Country boost in royalties from coal — a fossil fuel Labor has denounced — to build more spending monuments in health and education.

Much of this temporary revenue is being directed to hiring more public servants, not just frontline workers such as doctors and nurses but back office pen-pushers as well…

‘And so, Queensland is now drowning in debt. Forecast to be $83 billion in gross debt by 2020…’

‘Given up on paying down debt’. Higher Debt. Drowning in debt. More public servants.

How lucky are we Queenslanders?

The reason I’m sharing this good news with my fellow Australians is in the hope more of you will migrate here. That way our State’s GDP numbers — with more immigrants and more Government spending — will go throw the roof.

We’ll be the toast of the nation.

I can see the headlines now…

‘Queensland achieves GDP growth well above national trend’

The reality is this is no joking matter. We are sleepwalking towards a fiscal cliff and no one in the mainstream seems to be capable of joining the dots. No one’s telling people to wake up to themselves.

Our economic prosperity is a sham.

The GDP growth is a fraud.

According to data gathered from the RBA, ABS, and Australian Debt Clock, this is what’s happened in our economy since 2009 (the year the credit crisis bottomed out).

[Click to enlarge]

The generation of an additional $500 billion in economic output, required an additional 3 million people and $3.2 trillion of debt. Without these inputs, our country would’ve gone seriously backwards.

We now need more than $6 of debt to generate $1 of GDP.

This is not sustainable…especially if interest rates start rising.

Unfortunately, our institutions are held hostage to students of Charles Ponzi…although they would not see it this way.

They dress their economic quackery up with fancy terms and fake data, but when all is said and done, it’s a giant Ponzi scheme. More and more people have to go into more and more debt to keep the illusion of prosperity alive.

They say many a true word is said in jest.

Well, this cartoon shows you what those who we should be giving thanks to have in store for us when Fantasy Island meets reality.

Source: Advisor Perspectives
[Click to enlarge]


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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