Last of the Bubble Trilogy Coming Soon

Following the market’s explosive start to the New Year, last night was decidedly a low key affair. It was a case of steady as she goes.

Is this an uneasy calm, or a reversion to the deep seated belief that central bankers will do whatever it takes to make sure the casino remains rigged?

You and I may hold grave doubts about the bona fides of the global economic recovery, but we are in the minority.

Watching CNN Business yesterday morning made me think I was in another universe. Richard Quest and another journalist were querying why the US market was behaving so badly when the economic fundamentals were so good. They actually believe the dribble being sprouted by Yellen and co.

What we’ve seen since 2009 is the greatest con in history. It makes Bernie Madoff look like a rank amateur.

There has been a very deliberate and very expensive official campaign to maintain the illusion of prosperity. This is a Ponzi scheme beyond belief.

40 years on continuous credit expansion is addictive. People, businesses, banks and governments got hooked on the ‘growth’ drug.

The entire system had a dependency problem…we needed more and more growth to keep our dreams alive.

In 2008/09 the market delivered its verdict on this decades long debt financed economic growth experiment. It was an abject failure.

Life has a way of teaching us lessons. Either heed the lesson and adapt your behaviour or be condemned to repeat the mistakes.

The lesson from 2008/09 is an economic system entirely dependent on debt for growth is at risk of collapse. If you believe the press, we apparently came oh so close to this outcome in early 2009. Banks were teetering on the brink.

If those controlling the levers on this experiment saw the lesson in the dire outcomes of 2009, they obviously decided to ignore it.

Instead of progressively reducing the system’s dependency on debt, they ramped up supply.

Over the past six years, cheap and abundant money has propped up businesses that should have failed long ago. Or financed business ventures that should never have been started.

The legacy of the past six years of freely flowing credit is a host of underperforming businesses struggling under debt burdens. There are a multitude of Dick Smith type businesses out there.

Money was printed and savers punished to keep these zombies alive.

Precious little of this money went into the real economy. Thanks to Wall Street having first call on the Fed’s new money, the majority of it went into asset prices and securitised products to finance zombie companies.

Those chickens are now coming home to roost.

The world simply has too much debt. There is not sufficient revenues being generated to support all of these debt obligations.

What’s the answer? Our new treasurer is shrugging shoulders and going with the deficit flow. At least for now. But businesses and households do not have the luxury.

Like Dick Smith, they will go to the wall.

Factories, shipyards, mines, oil wells, sovereign nations and a host of other unprofitable enterprises are migrating towards the queue that says ‘defaults here’.

Meanwhile governments around the world are struggling to implement policies designed to kickstart stagnating economies.

Part of the strategy is propaganda — doctored data that gives the appearance of all being well. Unemployment numbers that show jobs growth…but replacing one highly paid miner with two part-time service sector jobs is not real growth.

We are told the property sector is picking up the slack from the mining industry. The numbers look good. But property and related purchases are made with a good deal of debt. Here we go again. Debt infused numbers dressed up to look like genuine economic activity.

Another part of the strategy is to continue running budget deficits. In Australia’s case our budget deficit is around $40 billion. This represents 2.5% of our GDP. Our GDP growth rate at present is…2.5%. Without our Government continuing to rack up more debt, we have no economic growth in Australia. And worse still, if you take the debt used to buy property out of the GDP numbers, we are going backwards.

The data gives a false impression of what’s happening in the real economy. People are dumbed down and stupefied by a barrage of numbers and talking heads, to believe all is OK so they remain faithful to the debt dependent economic model.

As the defaults start to transition from a trickle into a steady stream, overvalued assets are going to be swept away in the debt liquidation. We’ve seen this movie before…you may recall Lehman Brothers had a starring role. But that movie was a sequel to the dotcom show that hit theatres in 2000.

The scrip for the third movie in the trilogy is currently being written by Yellen, Draghi, Abe & co. It promises to be the biggest blockbuster EVER produced by the money creators.

At its very core the strategy is flawed.

It relies entirely on taking wealth from savers and giving it to borrowers. Thrift is punished and recklessness rewarded.

This is plain dumb, and doomed to eventual failure.

Bankers are getting rich from creating credit out of thin air, while people in main street are progressively getting poorer.

People can only tolerate so much before they become angry and downright hostile.

When (not, if) the third and final instalment in the bubble trilogy is released, the backlash in voter land will be palpable. However we have all been complicit (to varying degrees) in this fraud.

Sadly it is too late to avoid the fate that awaits us. Society’s conditioned desire to live beyond our means, means we are unwilling to accept the discipline required.

Interest rates should be set by the market, not central banks. This way savers and borrowers alike can decide on a fair price for money…not some economic theorist playing with a computer model.

Savings should be taxed concessionally. This policy worked a treat in providing a pool of savings for the rebuilding efforts of post war Germany and Japan.

The long term benefit of encouraging increased savings is potentially to reduce welfare dependency.

Bankers should be held personally liable for losses — nothing like a bit of skin in the game to create a culture of prudence.

Finally, governments must lead by example and run budget surpluses. Paying down debt and building sufficient reserves to enable lower tax.

There is a snowball in hell’s chance of anyone in banking and government taking any of these recommendations seriously. There is too much money and power at stake for that to happen.

Therefore it’ll be up to the market to deliver the lesson, again.

The third instalment promises to be a blockBUSTer.

It is going to smash all previous records.

The Glencores and Dick Smiths of this world are the preview ads for the yet to be announced premiere screening.

Vern Gowdie,

For 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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