The Deflationary Lessons from Kanesh

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

The problem with politicians is they think they have solutions. When in fact, 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.

And part of that problem, lies with us…the electorate.

We have — due to an extended period of excess — been conditioned to want ‘more’. Any serious attempt to rein in spending is met with public backlash. The more the proposed cuts, the greater the resistance…as Campbell Newman (former Queensland Premier) found out.

A spiral of debt

Therefore, we’re locked into a spiral of more spending, more taxes and more debt.

Governments on all continents are caught in this downdraft to financial ruin.

We have accumulated the highest level of debt in recorded history (and the pile grows higher every day), offset by the lowest level of interest rates in recorded history.

That should tell you something about the sad state of affairs the world’s finances are in.

No one seems to care.

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.

The world goes on as if the promises to pay back this debt, honour entitlement spending and fund pension payments are going to be kept. When in reality, the chances of this happening are on par with ‘a snowball in hell’.

In fact, our policymakers are so confident in this artificial growth model surviving, they encourage us via the cheap pricing of debt, to take on more. That’s how this economic ‘growth’ model functions — on high octane debt. But history repeatedly and emphatically tells us the model is doomed to fail.

The central bank’s brain trust’s ‘solution’ to a credit squeeze was to make credit cheaper — lower interest rates. The problem with the ‘cheap debt’ solution was it encouraged excessive levels of borrowing…more than US$90 trillion in additional debt has been accumulated since 2008. This is madness.

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.

So…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. This is the opposite of what we need in a world with slowing demand from highly indebted western consumers with stagnating wages.

Which is why store windows are adorned with ‘Sale’ and ‘Everything Reduced’ signs.

What’s the policy maker’s solution to the spectre of deflation?

We need to inject more money into the system to create inflation.

But, the only inflation we’ve seen since 2008 is in asset prices.

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

Given the parlous state of the world’s finances, there is precious little that world leaders 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, financial crisis hits, will have to do what no other political leaders have 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. But these declarations will only be made because policymakers have been backed into a corner by a massive market failure.

But none of this is new. The folly of our policymakers is just 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 over and over again.

The economic life of Kanesh

The New York Times published an article on the discovery of 4000-year-old clay tablets that 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 (emphasis is mine):

‘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.

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

The characters are different, but the plot is the same.

Thrift followed by excess, followed by failure, followed by an extended period of contrition. The economy is rebuilt from a much lower and simpler base…thrift once again takes centre stage.

The only thing new in the world is what you haven’t read in the history books.

While this might be new to us, the world’s debt problems are as old as Methuselah.

Even those in power with good intentions are powerless to stop the corrective forces that have been baked into the global system over the past forty years.

For every action there is an equal and opposite reaction.

The longer the excesses are permitted to continue, the greater the recoil.

Which is why it was a monumental error of judgement to not genuinely deal with the debt crisis a decade ago.

With each gradual rise in US interest rates, we are edging closer to the next crisis.

Society’s total and utter dependency on cheap credit and central bank sponsored asset pricing has reached a stage where ancient lessons are going to be taught to modern society.

Deflation and a return to a simpler way of life is in our future.

Regards,

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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