New Leader, Old Problems for Australia

With the state of the global economy, will Malcolm turn bull or bear on the outlook for Australia?

Meanwhile, in the red corner we have Bill short on genuine solutions and long on promises financed with tax dollars we don’t have.

There’ll be plenty of spin on who has the best plan to guide Australia through the challenges we face. My vote will go to the one who promises the least, because they will have lied the least.

The problem is politicians think they have the solutions. But government is the problem. More red tape. More taxes. More bureaucrats. More legislation. More regulations. More promises. More debt. The only thing there is less of is genuine reform.

All this tinkering by governments everywhere has left the world in a fine mess.

We have accumulated the highest level of debt in recorded history. Offset by the lowest level of interest rates in recorded history.

That should show you the sad state that the world’s finances are in.

No one seems to care. Everyone seems to genuinely believe the promises to pay back this debt will be kept.

Our policymakers are confident — at least, on the outside. They encourage us, via the cheap pricing of debt, to take on more.

The central bank brains trust’s ‘solution’ to a credit squeeze was to make credit cheaper. To lower interest rates. The problem with this solution is that it encouraged excessive levels of borrowing.

Credit is a promise to pay back money. Interest rates determine how much that promise will cost. Low interest rates make it easier to make promises…that may or may not be kept.

Let’s borrow to build rigs for oil supply. Let’s borrow to build a factory to manufacture widgets. Let’s borrow to open a coffee shop. Let’s borrow to develop a mine.

Cheap money encourages greater supply. Just what we need with slowing demand from western consumers. After a lag period, cries of deflation go up. We hear bleating by a mining magnate that a commodity price needs to be fixed. At a price above their production cost, naturally.

What’s the policymakers’ solution? Put more money into the system to create inflation. More cheap money. More borrowings. More supply. More concerns about deflation.

Government is not the solution — it’s the problem.

Given the parlous state of the world’s finances there is precious little Turnbull, Shorten, Santa Claus or the Easter Bunny can do to stop the deflationary forces headed our way. The die is cast.

Whoever is in power when the next and far more powerful GFC hits, will have to do what no other political leader has had to do in nearly a century…be (relatively) honest with the public.

The days of unfunded promises are over. The days of living beyond our means are over. The days of bigger government are over.

None of these declarations will be made voluntarily. As is the way with modern politics, the market will force these decisions on Canberra, Washington, London, Paris, Brussels, Berlin, Shanghai and Tokyo.

But none of this is new. The folly of our policymakers is but another chapter in the history books of economic success followed by spectacular failure.

Greed, power, fear and panic are all primal emotions. Which is why the pattern repeats itself.

The New York Times recently published an article on the discovery of 4000-year old clay tablets. The tablets provided great detail on the economic life of Kanesh, a trading community in Turkey.

The tablets covered the 30-year period from 1890BC to 1860BC.

Here’s an extract from the article:

The traders of Kanesh used financial tools that were remarkably similar to checks [cheques], bonds and joint-stock companies. They had something like venture-capital firms that created diversified portfolios of risky trades. And they even had structured financial products: People would buy outstanding debt, sell it to others and use it as collateral to finance new businesses.

Over the 30 years covered by the archive, we see an economy built on trade in actual goods — silver, tin, textiles — transform into an economy built on financial speculation, fuelling a bubble that then pops. After the financial collapse, there is a period of incessant lawsuits, as a central government in Assur desperately tries to come up with new regulations and ways of holding wrongdoers accountable (though there never seems to be agreement on who the wrongdoers are, exactly). The entire trading system enters a deep recession lasting more than a decade. The traders eventually adopt simpler, more stringent rules, and trade grows again.

Sound all too familiar?

Kanesh. Roman Empire. British Empire. Tulip Mania. South Sea Bubble. Mississippi Land Company. The Roaring Twenties. And more than likely The Great Credit Expansion of 1980 to 201…?

They’re all versions of the same story — over-reach, over-promise, over-indebtedness.

They all end the same way. With failure, followed by an extended period of contrition and rebuilding from a much lower base.

While our nation has a new leader, the world has problems that are as old as Methuselah.

Even with the best intentions, our new PM will be powerless to stop the corrective forces. The longer the excesses are permitted to continue, the greater the recoil.

The financial world is obsessing over whether the Fed will raise rates, by…wait for it…a whole one quarter of one percent. This shows how close to the edge we are. A movement in interest rates that is the equivalent of a bee’s willy, indicates just how sick the global financial system really is.

The dependency on cheap credit and government sponsored share values has reached a stage where ancient lessons will be taught to modern society.

I wish our new PM all the best, but history clearly tells me to prepare for the worst.


Vern Gowdie

Editor, 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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