Real Eyes Realise Real Lies (Part 1)

Is what you see the truth, or is it only what you want to see, or is what you’re being told to see?

The world is full of smoke and mirrors.

Our banks spend millions on PR to convince us that they’re good corporate citizens.

The veil on that deception has been well and truly lifted in recent months.

The art of illusion and deception.

What do you see in this picture?

Real lifes Realise Real Lies

Source: Black Sun Software

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An old couple looking into each other’s eyes?

Are they real eyes?

Or, are they the faces of a Mexican couple…the guitar player serenading the girl?

What you see is not necessarily the true picture.

And this is true of the global economy and financial markets.

When looking at the global economy, most people are happy being regaled by dulcet tones of central bankers…all singing from the same ‘growth’ hymn sheet.

Whereas, some see an ageing economy…one that’s well past its best years.

After all, the credit-funded consumption model has been around since the early 1980s…when interest rates peaked at 18%.

For the central banker music to continue playing, you need to realise it requires ALL (not just some) of the following to occur:

  1. A continued reduction in the cost of debt…interest rates to fall permanently into negative territory.
  1. Credit expansion to continue in ever larger dollar amounts each and every year…ad infinitum.
  1. More ‘quality’ population growth in the developed and developing world…not quantity.
  1. Rising ‘real’ incomes.
  2. The S&P 500 index repeating its 1983 to 2018 (35-year) performance of 10% per annum…taking the S&P (currently at 2900 points) to 84,000 points in 2053.

In this three-part series we’ll lift our eyes — just a bit higher than most — to realise the real lies in the central banker story.

Understanding interest rates

What are negative rates?

It’s when commercial banks are charged to park their reserves with Central Banks.

The ‘method in this madness’ is to encourage the commercial banks to lend, lend and lend some more.

Debt has been the lifeblood of all economic growth in recent decades.

The message from the central banks to commercial banks is ‘do not hold money with us or you’ll be penalised by receiving back less than 100 cents in the dollar’.

Currently, there are three central banks with negative rates — Japan, Switzerland and Sweden.

Only Keynesian economic theorists could make sense of this warped thinking…’if we can force people to go deeper into debt, then the debt crisis will be solved.’

Credit expansion must be achieved at all costs…irrespective of how truly bizarre the pursuit of this objective might become.

But, what if people are no longer willing to embrace debt?

What If people have debt fatigue or are at an age where savings trump debt or they are uncertain about their employment prospects?

If there’s a change in public attitude to further debt accumulation — no matter how much interest-rate punishment the central bankers mete out to the commercial banks, even if rates plumb to even lower levels — the public may not take the bait.

To date, the central banker model has been a simple one…the lower rates go, the higher the debt multiplier.

Here’s the maths behind the debt-funded growth model.

$  100k @ 16%  = $16,000 interest cost

$  400k @  4%   = $16,000 interest cost

$  800k @  2%   = $16,000 interest cost

$  1.6m @  1%   = $16,000 interest cost

Since the early 1980s, interest rates have progressively been lowered to facilitate greater debt levels.

The problem for central bankers is that there’s a limit to how low rates can go.

Commercial banks apply a margin of (approximately) 2% on loan rates over deposit rates.

If loan rates were to fall to 1%, deposit rates would need to be a NEGATIVE 1%.

Is that possible? Maybe.

But central bankers are getting awfully close to ‘pushing on an interest rate string’.

And, we must remember that nothing happens in isolation.

What impact would negative rates have on the savings of an increasing number of boomer retirees?

Force them to search for yield in junk bond offerings?

Then, when they lose big chunks of capital, they become a bigger cost burden to the Government.

Impoverished retirees are not good for an economic model that is dependent upon people spending more than what they earn.

I think we’re going to see this happening in the US in coming years as junk bond defaults start to escalate.

The ‘lower the rate, the higher the debt’ multiplier has a wrinkle in it that we are starting to see here in Australia.

Yes, you can double or even quadruple your borrowings and pay no more interest…but what about finding the extra principal repayment?

Interest only borrowers are now confronting this problem as they’re forced into P&I (principal and interest) loans. By some estimates, the principal cost is adding another 30% to monthly repayments.

To state the obvious — paying back a $100k loan is a whole lot easier than paying back a $1.6m loan.

Logic tells me the ‘reduce rates to borrow more’ strategy is (literally) living on borrowed time.

It may go on for a little while longer but for another four decades?

Highly unlikely.

If you want to protect your family wealth, you need to know why this financial expert is predicting economic collapse. Find out more.

Increasing global debt levels

How far can a rubber band stretch before it breaks?

It depends on whether that rubber band is made in Greece or Japan.

Greece buckled under a 120% public debt to GDP ratio.

Japan continues to defy the odds with a public debt to GDP ratio of 250%…and growing.

Globally, debt to GDP (at the end of 2017) was 318%…we have never, ever been in this territory before….so the extremities of this experiment are an unknown.

Every sector of the economy — private, corporate, public — has increased its debt load over the past two decades…courtesy of the lower rate multiplier.

Global GDP

Source: Business Insider

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While all this additional debt has artificially inflated GDP numbers, the growth trend in advanced economies is down.


Source: IMF

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Increased debt servicing commitments (principal and interest) means there’s less to spend in the economy…as those Aussie households switching to P&I repayments know all too well.

The world’s debt load is over three times the size of the (debt inflated) economy that’s meant to support the servicing of the debt

The economic base is not expanding sufficiently to support the debt apex.

As sure as ‘night follows day’ debt defaults are coming.

When that starts, the economy is going to shrink much faster than the debt levels.

This is what happened in 2008/09.

While this ‘multiplier effect’ can continue for a while longer, it’s not a sustainable proposition…we know this ends badly.

Without an exponential (and eternal) increase in debt levels, there’s no way the next 35 years is going to be anything like the last 35 years.

Next week, we’ll continue looking at the bigger picture to see if what we think we’re seeing is the truth or real lies.


Vern Gowdie,
Editor, The Gowdie Letter

PS: Financial expert Vern Gowdie explores why a credit collapse could occur in 2018, and how you can protect your assets. Click here for free action plan.

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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