Don’t Put This Noose Around Your Neck

Girl counting Australian money
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The RBA’s decision to leave interest rates on hold at 2.0% pushed our dollar a little higher overnight — to US$0.73 cents. According to the RBA’s statement our economic future shows some signs of looking a little brighter:

At today’s meeting the Board again judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate.

In truth we are in ‘wait and watch’ mode.

The RBA statement acknowledges ‘GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions in non-mining sectors over the past year.

What’s the RBA’s strategy to increase GDP growth? The same old tried and failed formula — encouraging more debt. Here’s the RBA’s grand plan to re-ignite our economy:

…monetary policy [interest rates] needs to be accommodative [low]. Low interest rates are acting to support borrowing and spending. While the recent changes to some lending rates for housing will reduce this support slightly, overall conditions are still quite accommodative.

Lowering interest rates to encourage us to borrow more is as responsible as having an open bar at an AA meeting.

Earlier this year Barclays Research Australia issued this warning (emphasis mine):

Australian households are the most indebted in the world, according to research by Barclays, which warns that the country would be vulnerable in the event of another global financial shock.

Barclays chief economist for Australia Kieran Davies says private sector debt-to-income gearing is currently at an all-time high of 206 per cent, up from a pre-global financial crisis (GFC) level of 191 per cent. This put Australia just within the top 25 per cent of the world when it comes to leverage.

Thanks to the RBA’s accommodative interest rates ‘to support borrowing and spending, Australians are slowly putting a noose around their necks.

When (not if) the next credit crisis hits and the financial ground gives way, a lot of Aussies are going to be left hanging. Wondering why they were so stupid as to build their unaffordable gallows.

The RBA Board should be the ones hanging their heads in shame for actively promoting an economic growth strategy that is fundamentally flawed.

You simply cannot keep borrowing more and more money, year after year, without consequences. Not recognising this obvious reality is just plain dumb. Yet this is what passes for credible economic policy these days. It just goes to show how divorced from reality we’ve become.

The stupidity in policymaking continues unchecked.

The RBA is throwing a debt and inflation party and if Australians don’t come to it, the RBA is going to make debt even cheaper (emphasis mine):

‘[RBA] Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.

‘Further easing of policy’ is central banker speak for lower interest rates.

‘Lend support to demand’ is code for doing everything possible to encourage more borrowing and spending.

We have built a world that is totally reliant on credit creation for growth. Policymakers are locked into a strategy that has to openly encourage more debt.

Imagine a set of scales — on the right side is savings and on the left side is debt. Which side weighs more? Left or right?

To quantify the weights for each side of the scales, we’ll use M2 money supply for savings. M2 money, as defined by Investopdia, is:

A measure of money supply that includes cash and checking deposits (M1) as well as near money. “Near money” in M2 includes savings deposits, money market mutual funds and other time deposits, which are less liquid and not as suitable as exchange mediums but can be quickly converted into cash or checking deposits.

According to World Bank data, global M2 money supply is around US$70 trillion.

On the other side, global debt as estimated by McKinsey & Co. earlier this year is over US$200 trillion.

Debt outweighs savings 3 to 1.

The financial system is literally geared to create more and more debt. When the central bankers sit down to work out how to re-ignite the golden days of debt-infused growth they don’t give a flying toss about the savers of the world.

When you strip away the central bankers’ economic jargon and official posturing, it’s all about making debt more affordable, more attractive and more available. Savers are being punished and borrowers rewarded. What sort of mixed up message is this?

A recent email from John G. expressed the frustration being felt by savers. Here’s an edited version of John’s email:

Over the years I have lost a very considerable amount of money by following the advice of so called Financial Planners and other “Gurus”. In fact, the only time I have ever made money is when I have followed my own investment strategies.

Now, in my senior years I adopt a very conservative approach and have most of my finances in online accounts with the “Big Fourwhich brings me to the main topic of this letter.

Self-funded retirees have suffered huge losses in their income since the GFC and most of us can only suffer in silence while the banks ever increase their profit margins at our expense.

I recall that you did touch briefly on this subject some time ago but so far no one has ever addressed this issue comprehensively and its about time it was taken up by the media.

It would be greatly appreciated by us retirees to see a concerted effort by you and your colleagues at The Daily Reckoning to publish a few articles exposing the underhanded way we have been, and are being treated.

Subscriber, John G

Retirees and savers have suffered a 75% reduction in income over the past eight years. The 90 day bill rate has fallen from 8% in 2008 to 2% today.

Source: RBA

Please tell me which other sector of the community has been punished as much for being prudent and saving for its retirement?

Glenn Stevens and other central bankers should be ashamed of what they have done. The blunt message they’re sending out to the community is, ‘forget saving and go further into debt’.

John, the reality is we could take out ads on prime time TV, on prominent billboards, and in major newspapers protesting at how unjust and perverted central banking policy has become. But it’ll be money (more of our savings) going down the drain.

The powerful global financial machine is greased, oiled and fuelled by debt instruments (in all their forms).

Money talks. And there is no louder voice than that of the banks and their lobbyists.

The major banks are the largest four companies in Australia — bigger than any mining, retail, telecommunication or building company. The financial sector did not become this dominant from opening up savings accounts and term deposits — they built a debt machine par excellence.

The sad reality is John and the many savers like him should prepare for lower interest rates in Australia.

The global economic recovery is a fraud. Strip out all the money being spent by governments (money created out of thin air), and the GDP numbers are in the negative.

Income starved retirees are not spending. Thousands of boomers are retiring each week. Governments are looking at ways to cut back age pension eligibility. Household balance sheets can only take on so much debt because of stagnant or low wage growth.

The RBA’s ‘growth’ model is under strain.

When the deflation in the global economy starts crushing in on Australia (the country with the most indebted households in the world) Glenn Stevens will be left with no choice.

He’ll do what his counterparts in the US, UK, Europe, Canada and Japan have already done for their debt-dependent economies — take interest rates towards zero.

Cheap debt is what it is all about.

Screw the savers.

Regards,

Vern Gowdie

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Vern Gowdie

Vern Gowdie

Vern Gowdie has been involved in financial planning in Australia 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 magazine as one of the top 5 financial planning firms in Australia. He is a feature contributing editor to The Daily Reckoning and is Founder and Chairman of the Gowdie Family Wealth advisory service and editor of the Gowdie Letter To follow Vern's financial world view more closely you can you can subscribe to The Daily Reckoning for free here.
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