The Economic Sinkhole

Moreover, downside risks to the world economy appear more pronounced than they did just a few months ago.

Current IMF World Economic Outlook

So what’s a central bank to do when faced with a soft economy?

Low interest rates are acting to support borrowing and spending.’ This is anextract from the RBA announcement on the 6 October 2015 interest rate decision.

That’s right, the supposed adult supervisors of the financial system encourages people to borrow and spend more. What happened to the banker’s creed of savings and thrift? That’s long gone.

All these academics bankers know is an economic growth model that is fuelled entirely by people putting themselves in hock for their whole lives. Like a drug dealer, they’re doing all they can to support your borrowing and spending habit. They should be ashamed of themselves.

Punishing savers and rewarding borrowers. Fractional banking has created a very screwed up world. The pressures — external and internal — are building.

Have you noticed the increasing number of sinkholes around the world?

Sinkholes can occur naturally and from human intervention — drilling, mining, construction, broken water mains, heavy traffic, building weight, improperly compacted soil and changes in the land surface. Without warning the earth opens up and creates these geological wonders.

In 2010 a sinkhole (measuring 20 metres wide and 30 metres deep) opened up in Guatemala City —swallowing a three storey building and a house.

Picture: Guatemala’s Presidency, Luis Echeverria/AP

Source: CBS News

According to (emphasis mine) a ‘cover collapse’ sinkhole occurs ‘when groundwater causes underground gaps that grow so big the ground above cant support them. These can be dramatic events, since the holes can grow big enough to swallow a house, a road, a field or a swimming pool, even as those above ground go about their lives completely oblivious to the growing danger.

Economic sinkholes form in much the same way…human intervention undermining the foundations.

Living within your means (thrift) and the cost effective production of goods and services (productivity) are the bedrock of a solid economy.

Bloated bureaucracies, heavily unionised workforces and miles of red and green tape do not make for a productive economy.

The Washington Post ran an article in September 2014 titled: ‘More businesses are closing than starting. Can Congress help turn that around?’

The first sentence is a statement of fact. The second sentence ‘can Congress help’ is just a dumb question. It was these professional political shiny-bums that created the environment that chokes the living daylights out of anyone wanting to start a small business. Politicians live in a world were ‘productivity’ is measured in how much useless legislation they can create.

The article went on to say:

Americans are starting fewer businesses, new companies are going out of business more quickly, and the new firms that do get off the ground are creating fewer jobs.

Small business — an absolute essential of an economy — is slowly being undermined by the bureaucrats and their political masters.

Thrift (savings), now there’s a joke. Who needs savings in a world of credit? Home loans, home equity loans, credit cards, in-store 48-month interest free financing, car loans, personal loans, payday lending, and throw in the local loan shark for good measure.

With zero interest rates, who would be stupid enough to have savings?

The new-fangled growth-at-all-costs economic model our central bankers are running does not encourage savings. Living within our means is so yesterday. Get with the fashion.

Spending, not savings, is the fuel of choice to drive the growth engine.

Our grandparents knew better. They lived through The Great Depression and appreciated the value of thrift.

Savings represent delayed gratification. Savings are used for sustained future consumption.

Debt is used for a one-off consumption, bringing immediate gratification — a sugar hit to the economy.

Year after year the economy needs more and more debt to maintain the growth rates. Hence the onward and upward trajectory of personal, corporate and government debt levels all around the developed and developing world.

While on the surface this appears to be growth, it is nothing more than a growing and festering pile of debt. Debt that is mostly for unproductive purposes — financing government over-promises, retail spending, building more factories and mines to sit idle, refinancing to pay for previous debts, borrowing for corporate share buybacks.

The weight of this debt pile is bearing down on the surface of the economy.

Underneath the surface there is further erosion occurring. Intervention in the functioning of markets — QE, ZIRP and Beijing’s blatant attempts to push the Shanghai Composite up — all in the name of the wealth effect.

Bad news is good news. Poor employment data is greeted with a rising share market.

US wage growth — in inflation adjusted terms — has not progressed in 20 years. US workforce participation — number of people engaged in employment — has fallen back to a level last seen 40 years ago. The number of US citizens receiving food stamps has trebled from 16 million in 2000 to around 48 million today.

Why do the stats on the US economy matter? This is the world’s largest economy…an economy made up of 70% consumption.

What we have is a situation where ‘…those above ground go about their lives completely oblivious to the growing danger.

The earth hasn’t collapsed underneath us from the weight of the debt pile and the erosion of economic fundamentals, so society remains blissfully unaware of the instability in the economic ground beneath them.

The more debt that is piled on and the greater the erosion of fundamentals the more precarious the situation. But ironically the more complacent people become.

Then one day without warning a giant economic sinkhole is going to appear — swallowing properties, businesses, retirements, share markets and decades of economic theory.

A lot of very angry people are going to demand an answer to why the politicians and central banks encouraged them to build their lifestyles on such unstable and poorly engineered footings. Knowing the ground beneath them was destined to crumble to dust, why did they persist with strategies that deliberately undermined the economic foundations?

Why didn’t they take corrective action to shore up the economic ground in 2008/09 rather than dig deeper and build higher?

There will be lots of questions, but it will be too late.

A prudent person lives by the creed of ‘an ounce of prevention is better than a ton of cure.’

These so-called financial engineers shouldn’t be let anywhere near a pick and a shovel, let alone high powered machinery. Knowing this means you wouldn’t trust anything they have constructed…irrespective of how it looks on the outside.

When the tremors caused by China’s shaky foundations start registering further up on the economic Richter scale, we are going to see massive sinkholes opening up everywhere — Europe, UK, Japan, US, Canada and Australia.

Personally I’ve moved to rocky ground. A barren area the Feds and politicians don’t want you to enter…a bank account. They discourage you from settling there with a policy of punitive interest rates. They know the earth beneath you in this area is reasonably solid, but settling there does nothing to promote their vision of growth…building a landscape crowded with debt skyscrapers on foundations that are barely strong enough to support a tent.

Sitting on the outskirts, watching this growth for growth’s sake from my more humble bank account, can get rather boring at times.

But one day soon watching debt edifice after debt edifice disappear before my eyes will be a sight to behold. My humble bank account may not be growing that high, but it sure won’t sink as fast either.


Vern Gowdie

Editor, Markets and Money

Join Markets and Money on Google+

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:

To read more insights by Vern check out the articles below.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money