Real Eyes Realise Real Lies (Part 2)

Seeing the future requires us to open our eyes.

As best we can, we have to try to sort out the real from the unreal.

Being told you can cure a debt problem with more debt, this is not real…it’s in the realms of fantasyland.

Yet, plenty of people have bought (or, more to the point, borrowed) into this carefully orchestrated version of ‘reality’.

The higher markets go, the more blinded people are to what’s really happening…over-valued assets become even more over-valued.

Sight is only ever restored after the inevitable has happened.

Leonardo da Vinci was a man way ahead of his time.

A true visionary.

Among da Vinci’s many inventions were the tank, the helicopter, the flying machine, the parachute, and the self-powered vehicle.

He said…’Blinding ignorance does mislead us. O! Wretched mortals, open your eyes!’

Blind ignorance is what took the financial world to the abyss in 2008.

And there was none so blind as those inside the system.

These extracts are from testimony given to the ‘US Financial Crisis Inquiry Commission’, held in April 2010 (emphasis is mine)…

‘I think all of us bear – not just all of us at Citi – failed to see the potential for this serious crisis…’

Robert Rubin, former Clinton Treasury secretary and member of the Citigroup board of directors.

‘In hindsight, it’s very hard to see how these structured products could have been accepted in the way (that) they were accepted…’

Charles Prince, Citi CEO

The subprime time bomb was hiding in plain sight…others saw it as clear as day.

Just because detonation took longer than expected, it didn’t change the reality of the situation…tick, tick, tick…the bomb was still active.

In hindsight, 2008 was only a dress rehearsal.

With foresight, we can outline the case for a much larger disruption to the global economy…one that threatens to unwind much of the growth of recent decades.

Since the early 1980s, the global economy has grown due to increasing reliance on more and more people going deeper and deeper into debt.

To facilitate this ‘growth’ model, interest rates have fallen from the high teens down to barely zero (or beyond).

The share market has been a major beneficiary of this ‘growth’…the Dow Jones index h as increased 26-fold (from 1,000 points to 26,000 points) over the past 35 years.

While this compound effect is now seen as ‘normal’, I can assure you it’s not.

The previous 26-fold increase in the Dow (from around 40 points to 1000 points) took…more than 85-years.

In this second part of ‘Real eyes realise real lies’, we look not only at whether the base of this giant Ponzi scheme can continue to expand (the quantity) but also the quality (are the populations growing in rich or poor countries).

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Population growth key contributor to GDP growth

Population growth (along with debt) has been a major contributor to GDP growth…in Australia and other major economies.

Australia has been increasingly relying on more people, rather than improved productivity, to lift economic activity.

Business Insider, 7 March 2018

And then there’s this extract from an article written by Ian Goldin (professor of globalisation and development at Oxford University). It was published in the Financial Times on 10 September 2018 (emphasis is mine):

Cutting immigration will hobble economic growth. It’s that simple. New research I have conducted with Citigroup suggests two-thirds of US growth since 2011 is directly attributable to migration. In the UK, if immigration had been frozen in 1990 so that the number of migrants remained constant, the economy would be at least 9 per cent smaller than it is now. That is equivalent to a real loss in gross domestic product of more than £175bn over 15 years. In Germany, if immigration had been similarly frozen the net economic loss would be 6 per cent, or €155bn.

Governments have boosted GDP growth rates by means of immigration programmes.

Faced with population pressures, governments are then forced to borrow to fund infrastructure projects…another boost to the GDP numbers.

Pressure is placed on property prices…forcing people to borrow more…another boost to GDP numbers.

Immigration can be a valuable source of economic growth provided it’s ‘quality and not quantity’.

If the immigration intake is based on bringing productive skill sets to your country, then that’s quality immigration. People who make a positive contribution to the economy can help grow the pie for all. They are also fin the financial position to take on debt…the lifeblood of our credit-system.

Whereas accepting unskilled people into your country is an artificial boost to GDP…government spending money it doesn’t have to provide additional services — welfare benefits, healthcare, public housing, legal aid etc. This spending counts as economic activity, but it’s literally, a false economy. Also, impoverished immigrants do not have the capacity to borrow. 

When quantity is more than quality

Europe’s refugee crisis is an example of growth in quantity not quality (productive output).

Former US Federal Reserve senior financial analyst, Danielle DiMartino Booth wrote, as reported in a article (emphasis is mine)…

The [anti-establishment 5-Star Movement] party is a right-wing establishment whose lifeblood is an enraged populace who have screeched “Basta!” as in “Enough!” with the graft and the Italian economy’s other economic burden, nonstop immigration from North Africa.

…the migrant crisis and its price tag may appear to be a relatively new phenomena driven by the devolution of Syria. To the Italians, the saga has stretched on for a generation. By way of geography and proximity and little more, Italian taxpayers are obliged to bear the brunt of the cost of the immigrant crisis.

Consider that the population of foreign born residents has quadrupled since 2002 to over five million. With that as a starting point for calculating the tab, is it any wonder taxpayers are affronted by the $15,000 per annum, per capita effective tax hike to cover the cost of the hundreds of thousands of migrants who continue to flood Italy’s shores?

Before taking this out of context as a cold-hearted view of the world, this is not a discussion about society’s humanitarian obligations. It’s about whether the population base can A) continue to expand in numbers sufficient enough to support the apex and B) whether that expanding base has the means to continue borrowing at an exponential rate.

Governments digging deeper into taxpayer pockets to fund humanitarian programmes is NOT how an economy generates sustainable organic growth.

Quality (value added) immigration is becoming a rarer commodity.

The following chart of annual population growth (based on UN projections) shows both the developed (OECD) and developing (BRIICS) worlds are in steady decline. Future global population growth is dominated by poor countries (the green band).

In the foreseeable future, global immigration is likely to be more quantity than quality.

Global population growth by consumer type

Source: economica.blogspot<

[Click to open in a new window]

The backlash in Italy to the rising costs of immigration is going to place enormous pressure on establishment political parties.

This will play out in Europe and other countries…which translates into ‘quantity’ immigration being curtailed.

But what about ‘quality’ immigration?

In Australia the pressures of immigration are rising to the surface. Here’s an excerpt from the Australian Financial Review on 22 July 2018…

…domestically, the tensions in that Australian success story [multiculturalism] are increasingly obvious.

Whether it’s the violence of Sudanese youth gangs in Melbourne or political calls for a radical decrease in the annual intake, questions about Australia’s immigration levels and approach are becoming much louder.

When the next crisis hits, and unemployment rises, the howls of protests about ‘foreigners’ taking ‘our’ jobs will grow louder.

Immigration numbers — both quality and quantity — are likely to be reduced significantly to appease local voters.

From both a statistical and political viewpoint, it appears that the ability to expand the base of the Ponzi scheme (in sufficient numbers) is rather limited.

Absent a fresh injection of new borrowers (with the financial capacity and desire to borrow), the future is not going to be a repeat of the past.

When you realise this, you can see the real lies in the growth story we’re being told.


Vern Gowdie
Editor, The Gowdie Letter

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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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