The Fed Has Created a Debt Consuming Monster

Janet Yellen is in three minds about interest rates.

She might raise rates in December. She might not raise rates in December.

And the third, most likely options is she is out of her mind.

After seven years of zero interest rates it has come to this pathetic guessing game of will she or won’t she raise interest rates by a whole 0.25%.

That, folks, tells you how dire the situation has become. Anyone who is over 50 will remember, not so fondly, the days of 18% interest rates…by comparison 0.25% is a drop in the ocean. It just goes to show how dependent the system has become on the ultra-cheap pricing of money.

Here in Australia our Reserve Bank Governor said on Thursday, ‘were a change to monetary policy to be required in the near term, it would almost certainly be an easing, not a tightening. 

Glenn Stevens is also out of his mind. He would have to be, to pursue this low and getting lower interest rate policy. This policy has failed in Japan, Europe and the US, yet we play follow the leader.

Why? Because it is all about debt, debt and more debt. Their thinking is we need to make money cheaper to accommodate more borrowing and spending.

Here’s a novel idea; low interest rates haven’t worked so why not try higher interest rates? Take us back to a 3% cash rate for starters, and gradually increase from there.

The mainstream response would be, ‘Are you crazy, you’ll slow down the economy, household budgets will be slugged $X per month in higher mortgage costs.’

Perhaps a little reality check on the perils of over-indebtedness and living beyond your means is what’s in order for today’s society. Better to do it in a semi-controlled environment than to get to the situation Greece did and have market forces plunge you into what is shaping up to be a two-decade long depression.

But this unorthodox approach is not in the central bankers’ playbook. When they look at their little How to Manage an Economy book under ‘D’ for debt, there is one and only one instruction; make it cheaper and more abundant. Their handbook should be retitled How to Mismanage an Economy.

The RBA did not have to cut to zero after 2008, because China saved our bacon. How did China save us? Well the standard answer is the ‘mining boom’. China bought as much as we could dig up and that income flowed back through the economy.

In fact the mining sector was making so much money, our then genius Treasurer, Swannie, sat bolt upright in bed one night and said, ‘I know what, let’s have a mining tax’.

When the government wants to tax you more, it really is a backhanded compliment.

It means you are too successful, and an easy target.

Governments just can’t keep their grubby little fingers out of any fat and juicy pie.

The mining industry should have been flattered by Swannie’s brilliant idea to deliver him that elusive and much promised — but never delivered — budget surplus.

Although Swannie’s real genius was in allowing the miners to draft up the rules relating to the tax. No wonder he got a tin badge by a tin pot magazine.

Speaking of juicy fat pies, the odds of a tax hike on superannuation and the GST are shorter than a one horse race.

But I digress. Back to China saving us from the economic scourge that infected northern hemisphere economies after the 2008/09 meltdown.

Yes China did buy a shipload of dirt from us to build more bridges, ships, factories, cities, fast train lines and highways.

Did China need more empty apartments, shopping centres and themed cities? Probably not. Did the world need China to build bigger ships to send more cheap ‘stuff’ to western consumers? Probably not.

In a world that is wired for growth, growth and more growth, this is the sole objective of central planners. Whether the growth is warranted or not, or is constructive or destructive is largely irrelevant. Just as long as that GDP growth needle keeps hovering above 7%, that’s all they care about.

But the growth was an illusion. China simply increased its borrowings from US$7 trillion to US$28 trillion…a quadrupling of debt levels in the space of six years (2008 to 2014).

China is NOT a miracle. China is a mirage.

Anyone with an IQ over 50 can go ballistic with a credit card and a home loan redraw facility to create the impression of wealth and prosperity. Heck, if you spend enough you’ll even be credited with doing your bit for the nation’s economy.

But what happens when you reach the outer limits of your borrowing capacity? You stop and the economic activity grinds to a halt. In fact, economic activity goes backwards as a big chunk of future income is required to pay debt servicing costs, and can no longer be directed to consumption.

China has reached the outer limits — for now — of its borrowing capacity. Slumping commodity prices are evidence of this.

This blind pursuit of growth with cheap money is setting the world up for a massive crash.

The boomer generation is no longer the credit-charging consumers they once were. When you are working in your 30s and 40s it seems like you have a lifetime in front of you to repay that debt. When you’re in your 60s and living off your capital, it’s a whole different mindset about consumption.

The next generation are too heavily indebted buying overpriced homes to spend to the same level that the boomers did.

China’s massive debt binge means the world has far too much supply capacity and not enough demand.

Deflation should start to pick up as the GDP numbers continue to weaken. Once the squeeze is on, countries are going to try to grab market share with another round of currency devaluation — Australia included.

Trading conditions are going to get a lot tougher.

Indicative of this, here’s an extract from an article I read last week from

The members of container operators under G6 Alliance announced cancellation of four voyages on service Asia-Europe. 

The container carriers intend to cancels several voyages in October 2015 on routes in western direction in response to changes in market demand and the low freight rates. 

The inefficient market and overcapacity on the routes Asia-Europe is carrying serious loses for the companies, which make some voyages even at loss. 

The container operators from the G6 Alliance, including MOL, NYK, OOCL, Hapag-Lloyd, APL and Hyundai Merchant Marine, followed the actions of other competitors on the market – 2M Alliance and OceanThree Alliance, all including the largest container operators in the world.

All those shiny new factories with their shiny new machines are not making enough stuff to put in the shiny new ships that were built to carry goods from Asia to Europe.

High debt and low revenues usually means one outcome: bankruptcy.

There’s another credit crisis coming, and it is going to make the sub-prime debacle look like a local building society collapse.

The world literally geared up for growth. It was aided and abetted by central bankers making money so cheap it became too tempting not to indulge.

Yellen and co are out of their minds for allowing the global economy to become so unstable.

All this interest in interest rates is wasted energy. Who really cares about a 0.25% interest rate movement when we have system that is teetering on edge of destroying 80% of investor capital?

They have created a debt consuming monster. What happens when that monster is no longer being fed? Starving people riot in the streets. Starving debt monsters riot in the markets.


Vern Gowdie

Editor, Markets and Money

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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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