The End of The Economy Growth Delusion

We’ve been sold a pup.

Hoodwinked into believing we could have something for nothing.

Want this or desire that, no worries…flash the plastic or draw on your home equity loan.

It’s yours. How easy was that?

Decade after decade — courtesy of lower interest rates making debt cheaper — we indulged ourselves in lifestyles our incomes could not afford.

All that credit-fueled consumption we dragged from the future to the past and present, must now be paid for. The stresses of past excesses are now in plain view.

CBS News reported on 28 August 2018…

Almost half of Americans can’t pay for their basic needs’

Here’s an extract…

‘Four in 10 Americans are struggling to pay for their basic needs such as groceries or housing, a problem even middle-class households confront, according to a new study from the Urban Institute. 

Despite the U.S. economy being near full employment, 39.4 percent of adults between 18 and 64 years old said they experienced at least one type of material hardship in 2017, according to the study, which surveyed more than 7,500 adults about whether they had trouble paying for housing, utilities, food or health care.

But this hardship is not isolated to the US economy.

Australian economy at risk?

ABC News on 29 August 2018…

Mortgage refinance rejection spike exposes number of Australians in debt distress

According to the article (emphasis is mine) …

Mr North [CEO of Digital Finance Analytics] has calculated there are now close to 1 million Australians on the edge of mortgage stress — defined by Digital Finance Analytics as borrowers who are going further into debt or eating into savings because their expenses are greater than their income.

The sole focus of central bankers and Governments (of all colours) has been to pursue ‘a growth at any cost’ mentality.

We are now being given a glimpse at what the cost might be…households under extreme pressure.

The financial hardship is having political consequences.

Discontent and disillusionment is being expressed at the ballot box.

In my opinion, this backlash is a by-product of the relentless pursuit of credit growth.

If credit creation had been more modest, then it’s possible unrealistic expectations may not have been created.

Had the Western world not gone on a credit-based consumption binge, perhaps globalisation (the growth of Asian manufacturing) may have had a slower uptake and a lesser impact on western employment and wage conditions.

Had we not aggressively embraced consumerism to the extent we have, there would have been less need for as many factories…reducing CO2 emissions.

We’ll never know.

However, the fact remains that the bill for the credit party of the past 40 years is causing households a good deal of discomfort. The repayment of principal and interest is taking money out of the consumption economy.

The diversion of income to debt commitments is the reason why it takes more and more debt to produce economic growth. And it’s this economic growth that provides plentiful employment and improving incomes.

This chart shows the history of how much debt is required to produce US$1 of GDP.

how much debt is required to produce US$1 31-08-18

Source: 720 Global

[Click to open in a new window]

Prior to 1980, a dollar of debt gave the US economy a reasonable amount of bang for its buck.

As debt gradually built up in the system, like a drug addict, it required more and more debt to generate the same economic ‘buzz’.

We’re well and truly into the ‘substance abuse’ stage of our debt addiction.

Households — in increasing numbers — have accessed greater amounts of debt at lower and lower interest rates to keep feeding the economy’s debt dependency.

There’s no doubt all this credit has created wealth — property and share values are much higher than 30 years ago — for those fortunate enough to have ridden the crest of this asset appreciation wave.

But is that wave about to crash the economy?

The following chart shows us the wave pattern in Technicolour detail.

This is an excellent chart — if you truly understand this chart you’ll appreciate the glimpse it gives us into our future.

Let me walk you through it.

the wave pattern in Technicolour 31-08-18


[Click to open in a new window]

  1. Blue bars — this is the annual population change from OECD countries + China, Russia and Brazil (referenced to left hand scale).
  2. Red bars — this is the annual population change from OECD countries + China, Russia and Brazil (referenced to left hand scale).
  3. Black line — FFR (US Federal Reserve Funds Interest Rate) — not referenced to any scale except that the FFR topped out at 18% in 1981 and is now flatlining on the zero line.
  4. Red line — global debt level (referenced to right hand scale).
  5. Green line — Global GDP (referenced to right hand scale).

The combination of …

  1. Population growth (more consumers able to take on debt).
  2. Falling interest rates (18% to zero percent).
  3. The removal of the gold standard.
  4. The introduction of fractional banking (being able to lend out more than 10 times the deposit base).

All these factors contributed to the exponential increase in global debt.

Prior to 1981, you can see global debt and GDP were pretty much in lockstep — which accords with the previous chart from 720 Global where a US$1 of debt gave the economy bang for its buck.

After 1981, the nexus between global debt and GDP was broken.

Increasing amounts of debt is required to lift GDP higher.

But, the dynamics of yesterday — positive population growth AND falling interest rates — are not in our future.

Population growth — in developed and developing countries — is in decline.

Where do interest rates go to from here?

Sure they can go into the negative, but realistically for how long and how far?

Over the past 40 years interest rates have been reduced from 18% to zero, facilitating the accumulation of US$250 trillion of debt.

Over the next 40 years, do interest rates go deeply into negative territory to facilitate the continued accumulation of debt?

Even in this upside down, crazy world of central banker manipulated finance, this notion borders on the preposterous.

With population projections pretty much set in stone, and interest rates left without much more wiggle room, it’s reasonable to assume we cannot continue borrowing US$5 or more to produce US$1 of growth.

Without the steady stream of greater levels of debt-funding, in my view, the growth platform of the past 40 years looks likely to collapse.

Then what?

As I see it, it could lead to two outcomes: A drastic re-pricing of assets and Governments reneging on entitlement promises.

This is, by far, the biggest debt powder keg in history…and we are sitting right on top of it.

There are a number of triggers that could light the fuse.

Debating which one it could be is somewhat academic.

The keg is stuffed full of debt explosives, the wick is dry and it matters little who throws the match. The fact is we have created a situation from which there are no good outcomes.

We are operating in a highly unstable world, due in part to central bankers sparing no effort or expense to make it appear stable…to paraphrase Minsky ‘stability begets instability’.

Declarations of ‘economic strength’ mask the reality of the situations. The strength they refer to only seems to make us weaker.

Economic growth — as measured by GDP — is a fraud.

Every quarter we’re told ‘our economy has grown’, is as a public declaration of another three months of over-indulgence.

I believe the day of reckoning on this period of recklessness is coming much faster than most people realise.

With more Australian households being left behind, the cracks are getting wider.

Wealth destruction, on a scale not seen since The Great Depression, is the ‘yin’ to the ‘yang’ of this prolonged period of excess.


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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