The End of the Greatest Fraud in History

Financial portfolio review
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Interest rates are on hold…for now. Savers should enjoy it while it lasts.

The Bank of Japan’s decision to move rates from slightly positive to slightly negative was all about weakening the Yen.

It’s another salvo in the currency skirmish that’s playing out between China, Europe and the land of the (ever) rising debt.

Australia cannot afford to have our currency strengthen in a world of weakening demand. Our interest rates are headed lower — much lower — during the course of 2016/17.

The US share market finished down nearly 300 points. Mixed earnings results, a weaker oil price and overall uncertainty about what’s happening out there seem to be the reasons for the negative result.

The beginning of the end of the greatest fraud in history. Deflation is coming, and our economic engine only runs on high octane inflation. Continually bringing forward future consumption (by borrowing today and repaying tomorrow) is reaching its use by date.

All scams eventually come to an end…some just last much longer than others.

The Fitzgerald Inquiry — officially titled ‘The Commission of Inquiry into Possible Illegal Activities and Associated Police Misconduct’ — was formally sanctioned in 1987 after police and political corruption in Queensland had, after so many decades, become so blatantly obvious.

I’m currently part way through a trilogy of books written by Matthew Condon — The Three Crooked Kings, Jacks and Jokers and All Fall Down. They cover the whole sordid period of police corruption in Queensland’s history.

The story starts back in the 1940s when police protection was afforded — for a price — to SP bookmakers and prostitution.

It all started out with a few dollars here and few dollars there. But as usual, people get greedy.

The nickname ‘The Joke’ was given to the collection and distribution of police graft. The longer The Joke went on, the more brazen the corrupt coppers became. Complacency breeds contempt.

The tentacles of corruption spread beyond the bookies and the ladies of the night to include hard drugs and illicit gambling. Millions of dollars in dirty money were being paid annually to the bent boys in blue.

The corruption went on for decades. Over the years, decent coppers tried to expose the corruption. But to no avail. Their careers were crushed by the forces of evil. Others, outside the police force, who tried to expose the fraud ended up as unsolved murder cases or imprisoned on trumped up charges.

The grand finale to this whole sorry saga was the appointment of one of the corrupt ringleaders, Terry Lewis, to the position of Police Commissioner. In the end, Lewis spent more than a decade in jail and was stripped of his knighthood — shows you what the title is worth, if someone of Lewis’ calibre can buy one.

The Fitzgerald Inquiry also resulted in three former Government Ministers being jailed and nearly saw Premier Sir Joh Bjelke-Petersen join them in a matching set of striped pyjamas.

A number of corrupt police officers turned State evidence for immunity from prosecution. Gutless wonders.

While reading the books, I can’t help but think of the correlation between the corruption that played out in Queensland over the decades and The Joke being played out on the global economy and financial markets since the 1970s.

It all started out ‘innocently’ enough with the abolition of the gold standard. The period of credit expansion did not begin in earnest until after the 1980s — when interest rates started to fall from their near 20% highs and baby boomers started to hit their peak consumption years.

The deregulation of the banking sector in the 1980s resulted in a relaxation of lending standards.

All forms of credit started to be peddled to consumers and businesses.

Technology and globalisation (manufacturing bases being moved to low cost Asian countries) kept a lid on inflation, which in turn maintained downward pressure on interest rates.

The lower interest rates went, the higher debt levels rose — 10% on $100,000 or 2% on $500,000 still resulted in a $10,000 interest cost.

Everyone was addicted to this credit fuelled economic growth model. Wages increased, house values increased, share markets rose, government give-aways increased.

There were those who questioned the sustainability of this model. But they were in the minority and easily drowned out. The longer the model kept delivering on the upside, the more discredited the voices of descent became.

An army of PhD Keynesian economists were employed to spread the message of ‘the more the merrier’. Not enough growth? Print, borrow and spend more. Simple.

Just like a lowly paid constable being recruited into The Joke by a ‘respected’ senior officer…no worries mate, we’re all doing it.

Easy money was on offer and we took it without really thinking about the consequences of our actions.

The subprime debacle should have heralded in a Fitzgerald-type inquiry into the actions of central bankers and their role in perpetrating this growth fraud on the global economy.

But far too many senior officers were in on The Joke — Wall Street CEOs, politicians of all stripes, bank executives and senior bureaucrats.

There was no way they wanted a spotlight shone on their activities…they had way too much to lose.

Instead, the bagmen on Wall Street were bailed out. Greater quantities of even cheaper money were released into the economy by every major central bank. The Chinese really embraced The Joke and quadrupled their debt levels in the space of six years (2008–2014).

Asset prices took off, mining booms were created, and attention was once again diverted from The Joke.

But this Joke is not funny. It has serious repercussions for anyone living in a modern society.

The smoke and mirrors stimulus of the past seven years is being found out…this is why share markets are getting nervous.

As more countries go deeper into negative interest rate territory, the more people start to question what was previously unquestionable…is this model sustainable?

National media scrutiny on Queensland corruption in the late 1980s resulted in the whole house of cards falling down.

With regards to The Joke being played on the global economy and financial markets, it’ll be the reverse.

The whole house of cards will fall down first, and then media scrutiny will see Yellen, Lagarde, Draghi et al hauled before Senate and Congressional inquiries to explain their actions.

As with the Fitzgerald Inquiry, only a token few will be sacrificed to appease the crowd. The rest will skulk off somewhere and be looked after.

As for the crowd, well, The Joke is on us.

The Joke provided plenty of good and profitable times while it lasted. However, as it unravels it’ll have devastating consequences. Consequences destined to reverberate for decades to come.

This Joke is no laughing matter.

Vern Gowdie,

For The Daily Reckoning

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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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