The IMF Has Read ‘The End of Australia’

When the penny finally drops, the usual refrain is ‘better late than never’.

Unfortunately, far too many debt pennies have been amassed for there to be a ‘better late than never’ outcome.

There are no good consequences to be experienced from the debt malaise we find ourselves in.

We’re in far too deep.

Even the architects of this failing experiment can see the writing on the wall.

And it’s not pretty.

An article in The Australian on Wednesday, 4 October 2017, titled ‘Australia could be left exposed, IMF warn,’ brought a wry smile to my face.

This is what humoured me (emphasis mine):

Rapid growth in household debt works as a short-term sugar hit to the economy but leaves a long hangover with reduced growth, higher unemployment and the risk of a banking crisis, the International Monetary Fund has warned.

Finally, the International Monetary Fund (IMF) gets it…

In the short term, an increase in the household debt-to-GDP ratio is typically associated with higher economic growth and lower unemployment, but the effects are reversed in three to five years.

It’s far too late in the day for wisdom to suddenly dawn.

At the risk of being called a ‘broken record’, I’ve stated repeatedly that Australia’s record recession-free run was primarily a function of an increase in the household debt-to-GDP ratio.

More and more debt delivered higher economic growth.

But the days of economic nirvana are now behind us.

Too many Australian households are feeling the pressure.

The Courier Mail, on 3 October 2017, wrote (emphasis mine):

Almost 50,000 households are at risk of defaulting on their home loans in the next 12 months and nearly a third of homeowners are in mortgage stress, new figures show.

The latest mortgage stress and default modelling from Digital Finance Analytics for the month of September reveals more than 905,000 households are estimated to be in mortgage stress — 45,000 more than there were the month prior.

And even high income households are feeling the squeeze.

The blame for this impending (and what history will judge as epic) tragedy lies fairly and squarely at the feet of the Reserve Bank of Australia (RBA).

Yes, people can choose whether or not to take out a loan.

However, after more than three decades of being conditioned to debt-funded growth, the central bankers knew that if they took rates low enough, people would take the bait.

The RBA — with its accommodative interest rate policy — knowingly encouraged people to slip the debt noose around their own necks.

The blind pursuit of ‘economic growth’ has delivered us to the point where the end of Australia, as we know it, is now coming into plain view.

Ireland, Japan and the Netherlands have all at one stage been hailed as economic successes…with extended recession-free runs. These ‘successes’ were simply a by-product of an increase in the household debt-to-GDP ratio. In each and every case, a severe and prolonged recession followed.

Sadly, this is what awaits our so-called ‘miracle’ economy. 

Finding something to smile about in this sad and sorry state of affairs is not easy. 

However, the ‘sugar hit to the economy’ took me back to The End of Australia…the book I started writing almost three years ago.

This is the heading on page six:

‘Credit is a high calorie sugary fix and savings are a vegan diet’

Here’s an edited extract from this section of the book:

The girth of the global economy has expanded decade after decade on a high calorie intake of credit. The level of sugar build- up in the system has rendered the global economy sluggish and extremely unhealthy.

Going “cold turkey” to a vegan diet will be a massive (but essential) shock to the system. The withdrawal symptoms are going to be far more painful than people are prepared for.

Unfortunately, the economy has to suffer this “dietary” extreme before we can return to a more balanced, stable and sustainable economy.

There’s no doubt the “she’ll be right mate” attitude has served Australians well when the chips were down. Most Aussies have a quiet confidence in our ability to overcome and capitalise on whatever challenges are put to us as individuals or a nation.

However, with what I believe awaits the country within the next decade, Australia and Australians will need much more than the Aussie spirit to survive.

The prospect of our “lucky country” entering a prolonged period of extreme hardship — or Long Bust — gives me no joy.

However, the facts are what they are.

No amount of wishing it could be different will change the facts…imbalances, unfortunately, must be corrected.

An attitude of “she’ll be right” may assist in providing us with a coping mechanism…putting on a brave face amidst a world of turmoil.

But behind closed doors, the brave face will give way to the inner demons of:

  • Is my job safe?
  • How will we cope on one wage?
  • Will I ever find employment again?
  • Will we be able to keep our house?
  • Why did we borrow to buy that second property?
  • How much more will my superannuation lose?
  • Are we going to be able to keep the business open?
  • Can we afford to keep the children in private education?
  • Will there be a job for me after uni?
  • Will we be able to retire?
  • What if the government cuts back on the age pension?

These are questions framed by fear…the fear of losing lifestyle, assets, employment, business and entitlements.

The coming collapse of the global debt super cycle…and the ensuing Long Bust here in Australia…means everything we’ve grown used to as being normal is going to be challenged.

As much as it pains me to say this, we have passed the point where remedial action can save our nation from the fate outlined in my book.

We’re addicted to debt…the federal government, state governments, local governments, corporates and households.

Our $1.7 trillion economy is supporting nearly $6.5 trillion of debt.

We have almost $4 of debt for every $1 of economic activity…this is not sustainable.

Those charged with being the prudent guardians of our financial system have proven to be anything but.

Therefore, we, as individuals, must take responsibility to safeguard our own personal financial situation.

How do you do this?

Do the exact opposite of what the herd is doing…pay down debt, reduce share exposure, and invest heavily in cash.

Better to do this sooner rather than later — because when the penny does finally drop with society, it’ll be far too late.

To understand more about how to take a contrarian approach to your financial situation, go here.

Regards,

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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