Time to Learn the Truth About Our ‘Record Breaking’ Economy

You can only live a lie for so long.

Bernie Madoff lived his for a couple of decades.

In the next year or so we’ll find out if Chris Dawson (the man who allegedly murdered his wife) has been living one for nearly 40 years.

The problem with telling fibs is that something unexpected happens — like a GFC in Madoff’s case, or a podcast — to unravel the fabricated story. People start questioning.

Eventually the truth wins out.

And Australians are starting to learn the truth about our ‘record breaking’ economy. It’s all been built on one big fat lie…you can borrow your way (indefinitely) to prosperity.

Front page of The Australian on Thursday 6 December 2018…

‘Slowdown puts rate cut on radar’

Here’s an extract…

‘The Reserve Bank could be forced to cut official interest rates deeper into “emergency” levels after unexpectedly soft figures revealed Australian consumers were pulling back on spending amid accelerating house-price falls, sluggish wages growth and rising bills.’

Unexpectedly soft figures?

Not by us. This outcome was entirely predictable.

The Australian economy has remained recession free due to households continuing to borrow from the future. Lower interest rates made it possible to ‘travel’ much further into the future than previously imagined.

Households have willingly (but unknowingly) sentenced themselves to decades of debt servitude.

The combination of stagnant wages and rising loan costs (due to higher interest rates in offshore wholesale markets) has awakened (enough) people to the reality of the situation…it’s now time to do the ‘hard labour’ and repay these debts.

Revealed: The truth behind our ‘unofficial’ GDP. Download the free report today.

And, this is before the pending implosion on Wall Street begins wiping out tens of trillions of dollars in value from global asset markets…adversely affecting portfolios, superannuation funds and property values.

The economy functions on a balance of confidence…too much and we have boom times and too little, we fall into recession/depression.

At present the confidence scales are delicately poised…slightly tipping towards caution and a little reluctance.

When the US share market falls hard, the shock waves from Wall Street will radiate into all corners of the world.

Everything — shares, tech start-ups, property, artworks, cryptos, collectibles — has been a beneficiary of the one common denominator…the addition of a further US$100 trillion of debt since 2008/09.

The likelihood of the RBA cutting rates should come as no surprise to readers of The Gowdie Letter…we have consistently said the next move will be down…even when all the commentary was to the contrary.

It simply did not and still does not make any sense that you could cure a debt problem with more debt. All that this ‘solution’ achieves is to push the problem into the future AND make a bad situation far worse.

Don’t worry the creators of this problem have a solution…

The front page of The Australian on Friday 7 December 2018 reported that RBA Deputy Governor Guy Debelle said…

It is the level of interest rates that matters and they can still move lower’

and, the RBA isn’t ruling out printing money …

‘Quantitative easing is a policy option in Australia, should it be required.’

The combination of Bill Shorten and QE makes for the easiest of predictions…Australia’s public debt tops $1 trillion. That’s an almost guaranteed ‘I told you so.’

While it’s still a little early to say ‘I told you so’ on the current situation, it appears the future has arrived and the piper is asking to be paid.

The flagging of the RBA’s ‘lower interest rate’ response is further evidence the deflation theory, that underpins The Gowdie Letter investment strategy, is still on track.

The problem for the RBA is that cutting rates won’t ‘cut it’

The banks will only pass on some (if any) of the official rate reductions.

If the RBA is cutting interest rates, it means our economy is soft. A soft economy could see a rise in mortgage stress and defaults. More defaults lead to the banks making greater provision for bad debts.

Ratings agencies — concerned over banks being over-exposed to residential real estate — could lower the credit rating on our banks. A lower credit rating means the banks are charged a higher rate to access funds in the offshore wholesale markets.

It’s quite possible the RBA’s rate cuts are (partially or wholly) counteracted by rate increases in offshore credit markets.

This is a vicious cycle of the central banks own making. The RBA should never have gone for the short-term fix of lowering rates to entice people to borrow far more than they could afford in the long term.

Yes, the banks deserved to be blamed for lax lending standards and their greed.

Free Guide: Australia’s ‘Unstoppable’ Economy. Download now.

But let’s go back to the source. There’s no way the banks could possibly have lent as much as they did, without the RBA taking rates to historic lows…and keeping them there.

The buck stops with the RBA (and other central banks). Their economic growth model — built entirely upon debt-funded consumerism — is nothing more than a BIG FAT lie being told to a gullible society.

As the economic situation deteriorates, public anger will pressure the politicians into convening another Royal Commission…one that looks at the role of Central Banks in our economy.

Hopefully, Rowena (Shock and) Orr is the one asking the questions of the RBA Governor.

Here’s one simple question that should asked…’Why did you think it was appropriate to pursue a policy that, at its core, attempted to cure a debt problem with more debt?’

The response will be full of economic ‘gobbledegook’ backed by (flawed and discredited) academic theories. But their egos and arrogance (borne from a belief in academic superiority) will not permit them to say ‘Everything we believed in was totally and utterly wrong. Sorry.’

Sorry would be nice, but it also doesn’t cut it. The damage will have been done.

We cannot afford to be wrong. We don’t have a generous taxpayer funded pension and an income from academic speaking engagements that’ll insulate us from the coming economic downturn.

We have to get this right and erring on the side of caution should keep us out of harm’s way.

While the truth does eventually win out, it’s far better to recognise the lie beforehand than it is to pay the price of gaining wisdom after the event.

Regards,

Vern Gowdie,
Editor, The Gowdie Letter


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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