How the Growth of ‘Grossly Distorted Production’ Ends

The big mover this week was the gold price…down nearly US$70/oz.

Don’t be surprised to see a rebound in the precious metal. There’s nothing technical to support this outlook. It’s based solely on the pervading level of negative sentiment. When the majority are bearish, usually the reverse happens.

Share markets are stuck in a sideways trend.

As anticipated, interest rates were left unchanged.

We also learned this week that the world’s hottest property markets are not getting any cooler.

According to the recently published UBS ‘2016 Real Estate Bubble Index’ report, there are six capital cities with property bubbles in search of a pin.

In order of bubble size, they are: Vancouver, London, Stockholm, Sydney, Munich, and Hong Kong.

UBS pinpointed the three main drivers behind the bubble as being ‘a flood of foreign capital, loose monetary policy, and bullish expectations from buyers.

Cheap and abundant money, combined with over exuberance and an extrapolation of a trend, does it every time.

The warning signs are there, but the so-called adults at the party are either ignorant to what’s happening or arrogant in their belief that they know what they’re doing.

Either way, it is a disaster waiting to happen.

More and more respected mainstream economists — not just your run-of-the-mill Markets and Money editor — are speaking out and warning about the dangers building within the system.

Stephen Roach is the former Chairman of Morgan Stanley Asia, and the firm’s chief economist. He is also a senior fellow at Yale University’s Jackson Institute of Global Affairs, and a senior lecturer at Yale’s School of Management.

On 26 September 2016 he wrote an article titled ‘Desperate Central Bankers’.

These are the final two paragraphs (emphasis mine):

While financial markets love any form of monetary accommodation, there can be no mistaking its dark side. Asset prices are being manipulated across the board — stocks and bonds, long- and short-duration assets, as well as currencies. As a result, savers are being punished, the cost of capital is repressed, and reckless risk taking is being encouraged in an income-constrained climate. This is especially treacherous terrain for economies desperately in need of productivity-enhancing investment. And it is not dissimilar to the environment of asset-based excess that incubated the 2008-2009 global financial crisis.

Moreover, frothy asset markets in an era of extreme monetary accommodation take the pressure off fiscal authorities to act. Failing to heed one of the most powerful (yes, Keynesian) lessons of the 1930s — that fiscal policy is the only way out of a liquidity trap — could be the greatest tragedy of all. Central bankers desperately want the public to believe that they know what they are doing. Nothing could be further from the truth.

That’s telling it as it is.

Zero to negative interest rates punish savers and encourage reckless risk taking.

People with a false sense of belief that men and women with their hands on the monetary levers actually know what they’re doing have pushed asset prices to excessive levels.

The truth is they’re making it up as they go, and they have no idea how to get themselves out of the mess their policies have created.

More and more cheap debt to encourage even greater levels of reckless behaviour is not the answer.

On 28 September 2016, Carmen Reinhart, Professor of the International Financial System at Harvard University’s Kennedy School of Government, published an article titled ‘The Perils of Debt Complacency’.

In countering the ‘governments should borrow to build infrastructure’ line that’s being peddled as the ‘cure-all’ stimulant for growth, Professor Reinhart stated:

The case for near-term fiscal stimulus, even if in the form of increased infrastructure outlays, cannot ignore the medium-term outlook for economies with already large debt obligations, major entitlement burdens, aging populations, and what appears to be a steady downward drift in potential output growth.

In other words, you do not burden an already overly-indebted economy — especially one with slow growth prospects — with more debt. That’s just common sense, but that’s a commodity in very short supply when it comes to central bankers.

The blinkered view from the lofty perch of central banks and governments is…GROWTH.

The news soundbite of ‘growth’ is all that’s needed to keep the masses happy.

Jobs growth. Corporate earnings growth. Economic growth. House price growth.

Keeping public confidence up is paramount in a world built on a big, fat lie.

To maintain confidence, it’s imperative the statistics lie…maintaining the illusion of growth.

Unemployment numbers are tortured to say anything the bureaucrats want them to. House price data is massaged to paint a positive picture. Corporate earnings are manipulated with share buybacks to mask the company’s true revenue position.

Then there are the GDP numbers — what I call the Grossly Distorted Production.

This is what I wrote recently in The Gowdie Letter to explain this distortion:

Happy 25th Anniversary of Australia’s unbroken economic growth.

June 2016 quarter GDP growth came in @ 0.5% making it a full 3.3% growth rate for the 12-months.

All we need is another three quarters of positive GDP numbers and we surpass the Netherlands record of uninterrupted economic expansion.

The Lucky country indeed.

According to the Australia Bureau of Statistics (ABS) in 2010/11 our GDP was $1.32 trillion

Five years later, in 2015/16, our economic output has grown to $1.67 trillion.

Our economy has expanded $350 billion over the past 5-years.

However, in 2010 our national debt (public, corporate and private) totalled around $4 trillion.

The latest national debt tally is slightly over $6 trillion.

We’ve added $2,000 billion to our national debt to create economic ‘growth’ of $350 billion.

It’s taken nearly $6 of debt to generate $1 of economic activity.

In 1990 — when the so-called miracle economy began — our total national debt was less than $ 1 trillion. Over the past 25-years we have accumulated a further $5 trillion in debt.

As a nation we are told to celebrate our economic success, when in reality that success is a fraud. Therein lies the problem.

People genuinely believe our economy is some sort of miracle, when it is nothing more than a debt-hazed mirage.

Based on that widespread belief (combined with ultra-low interest rates) the debt binge continues as if nothing can go wrong.

Stability creates instability. The greatest risks are when people do not perceive risk. More and more debt accumulation over the past 25-years is evidence of complacency.’

And we are not alone in fabricating economic growth. Here’s a chart showing US GDP growth since 2009 amounting to US$3.7 trillion. That ‘growth’ has come at the cost of an additional US$9.8 trillion of debt.

Strip out the US government debt, and the US economy has gone backwards by more than US$6 trillion. Go one step further and take out all the other debt — local and state government, corporate and household — and it becomes an even bigger number.

US economic growth

Source: Economica.blogspot
[Click to enlarge]

The gross distortion of data has gone on for so long that no one really bothers to question how the numbers are compiled. It is all quantity and no quality.

If you want better top-line growth numbers, as a country, you just borrow more money.


When you recognise the obvious flaw in this ‘growth’ model — more and more debt is needed just to stand still — you realise we are living (literally) on borrowed time.

I get the feeling mainstream economists are looking to distance themselves from the inevitable central banker created breakdown that’s coming.

As they say, ‘success has many fathers, but failure is an orphan’. I think they’re building a body of work that enables them to say (after the Greater Depression hits): ‘It’s not mine, I was warning against this’.


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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