Symptoms of the Economic Malaise

Clinton or Trump?

Which one gets your vote?

Most people in Australia say ‘Clinton’.

Why? Because Donald is either a buffoon, misogynist (funny how no one knew that word until a few years ago), brash, vulgar, or all of the above.

People opt for Clinton because she at least looks presidential — a well-spoken liar with a political pedigree. Alternatively, maybe they just think it’s time for a female US President.

Based on that reasoning, it might not be long before it’ll be time for a transgender Commander-in-Chief…

From a distance, we watch and wonder how Trump has managed to go from a sideshow to a serious contender.

The upcoming US election was supposed to be the showdown of the dynasties — Clinton versus Bush.

While most Australians shake their heads at the prospect of ‘President Trump’, you have to ask why he — in spite of all his political incorrectness — is gaining momentum.

Maybe the answer is obvious.

Lower-to-middle-class Americans are being left behind. The dawning of this reality has been a long time coming.

This chart identifies the period that the screws started turning on the lower and middle classes.

Source: US Center on Budget and Policy Priorities

[click to open in new window]

The post-Second World War period of prosperity lifted all income boats.

The top 5% (95th percentile), middle class (median) and the bottom 20% (20th percentile) of households all shared in the riches created from a world that was rebuilding and rebirthing.

This lasted up until 1970…in all, this golden period lasted for 25 years.

Then the decade of high inflation, oil shocks, interest rates nudging 20%, recessions and high unemployment threw a spanner in the works.

In real terms (after inflation), wages stagnated during the 1970s across all levels of society.

That all changed in the 1980s — inflation was under control, the oil price stabilised, and financial deregulation was ramping up (banks aggressively competing for business).

The top 5% of households gathered the lion’s share of the spoils. There was no more caring and sharing.

The rich got richer and the rest felt left behind.

The age of consumerism and ‘keeping up with the Joneses’ had set in.

Don’t have the income to keep up? Why not borrow?

Bridging the gap between the haves and have-nots was made possible by all sorts of loan facilities — home equity loans, in-store financing, credit cards, and the real cherry on the cake, subprime lending.

It’s no coincidence the rise in household debt-to-GDP ratios occurred at the same time US incomes started to diverge.

Borrowing more was made possible by gradually reducing the cost of money (interest rates). The higher the debt pile, the lower the interest rates.

No one seemed to care about the limited (albeit long) shelf life of this economic model. Year after year, the system kept functioning. Artificial prosperity kept the dumbed down crowd content.

The politicians could offer more pork barrelling. Everyone was (relatively) happy.

In 2008–09, the US found out that flatlining incomes could only service so much debt…irrespective of how low interest rates were. Shoehorning people into loans to live the American dream (which just so happens to be the same dream in Australia and many other countries) gave ‘happy’ a whole new meaning.

The near-death experience of US financial institutions in 2008–09 was the result of a system that didn’t know its limitation.

Push, push, and push some more.

The central bankers were supposed to be the responsible adults…the ones who knew where the boundaries were.

Not so — they acted more like drug dealers. Doing and saying anything, and everything, to keep the system hooked.

Rather than act with some form of contrition and remorse for their actions, they brazenly doubled down on the strategy that took us to the brink.

The price of money was reduced to its lowest level ever in history. Trillions of newly digitised money was released into the system.

Those with flatlining incomes did not take the bait. Which is why Walmart is closing down stores.

The real economy — the one supported by the spending from the majority and not the minority — has never really recovered from 2008.

The glory days of feeling prosperous (even though it was artificial) are long gone.

Trump is appealing to people who long for the ‘Good Ol’ Days’ and want some country/race/religion/banker to blame.

Trump, the populist politician (who doesn’t act or sound like the cookie cutter politician) has tapped into a rich vein of lower and middle class discontent.

This is happening in Europe too — left and right wing parties are gaining traction. Britain’s upcoming referendum on ‘do we stay or do we go’ is polarising that country.

The escalating European refugee crisis is only going to heighten tensions on both sides of the English Channel. That may give rise to even more Trump-like candidates emerging to cure all that ails the world.

The wheels are falling off the economic growth wagon. People are searching for someone to tell them it will all be OK…provided we do this, that or use any other illogical solutions to fix our problems. Anything that involves not having to face up to the ugly truth.

Claudio Borio, head of the Economic and Monetary Department at the Bank for International Settlements (the central bankers’ central bank), released a report on 10 February 2016 that laid bare the ugly truth:

Symptoms of the [economic] malaise — the “ugly three”:

  1. Debt too high;
  2. Productivity growth too low;
  3. Policy room for manoeuvre too limited.


The ugly truth is not what people want to know about.

Any politician with an eye on the polls is not going to tell the electorate to tighten their belts and get off their backsides; nor would they announce that the government has limited capacity to help them.

The ugly three are a symptom of the wage disconnect that started decades ago.

When people discovered — with the help of their friendly banker — they could buy a lifestyle they couldn’t afford, the rot set in.

Debt levels, complacency and bureaucracy grew like Topsy.

The entitlement era — everyone seems to be entitled to something these days — replaced the productive post-Second World War era. Grab what you can, from whoever you can, while you still can.

The ugly three are not going to get any better with the election of either Clinton or Trump.

If anything, they’ll become even more grotesque.

It really does not matter who wins the US election. The damage is done. The institutions that are meant to safeguard society have been corrupted by the ‘easy money’ model.

The US, like the rest of us, are going to be confronted with the truth soon enough. It will not be pretty.

Vern Gowdie,

Editor, Markets and Money

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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