What have we done to ourselves and the following generations?

[7 min read]

When you survey the path we’ve travelled over the past four decades, our progressive march towards self-implosion comes into focus.

We’ve created a make-believe world…one that must surely end badly.

Tax revenues are not sufficient to meet promised (and growing) expenditures…so we borrow.

Household incomes are not sufficient to meet expected lifestyles…so we borrow.

Corporate revenues are not sufficient to meet debt servicing costs or dividends payments or to increase earnings per share organically…so we borrow.

Everything is on the never-never.

Why?

Because as a society we have become conditioned to want more return from less effort.

The US economy is the prime example of this (and where the US goes, we largely follow).

Since 1980, the average wage and salary (on an inflation-adjusted basis) has not increased to any great extent. The recent spike up is an aberration due to a large number of lower-paid workers being laid off when the economy was shut down. As those workers slowly rejoin the workforce, the trend will resume.

In spite of the lack of any significant wages growth (among the general population), we see total financial assets as a % of household disposable income (blue line to left-hand scale), has steadily increased.

Incomes stagnate yet wealth rises…does that seem odd to you?

The great enabler of this illusion has been interest rates (red line to right-hand scale)…falling from 18% to zero.

The steady decline in the cost of debt has provided households (and corporates and governments) with the means to access society’s insatiable appetite for more.

With each passing year, self-destruction is all but assured. The longer the illusion remains people’s reality, then the more certain the ultimate fate.

Demands for more escalate. Expectations increase. And when the system falters, central bankers apply a disproportionate amount of triage. Which then reinforces the mindset of more. The cycle of ruin spins ever faster.

But it wasn’t always so.

The debt super cycle that began in 1950 has two distinct periods — pre-1980 and post-1980.

Prior to 1980, the frugal depression-era generation had a more responsible and respectful attitude towards debt. Debt was used primarily for productive purposes…not wanton spending on the latest consumer fad.

A dollar of debt (blue line) generated (almost) a dollar of economic output (GDP).

Lending institutions were far more stringent in their loan criteria. Rising interest rates in the 1970s also contributed to keeping a lid on debt accumulation.

After 1980, these dynamics changed. Baby boomer consumers (eager to break the shackles from their austere parents) started to outnumber the older generation. Financial institutions relaxed lending standards. And as we know, interest rates fell…and fell hard.

Every graph on debt accumulation, shares and property markets shows a distinct upward trajectory after 1980. Credit creation flowed through to asset price appreciation.

Wealth was being generated like never before. The boomers were on a roll. In the midst of becoming wealthier, we rarely questioned why.

The world of prosperity — steadily increasing economic activity, increased share markets and rising property values — was taken for granted. This was how our world functioned. It was our norm.

It’s only with hindsight we can see this has been a period of make-believe.

An economic and investment purple patch made possible by credit creation on a scale never before seen.

The US' $20 trillion economy is supporting a US$80 trillion debt load…$4 of debt to every $1 of economic output. Unproductive debt is a cancer that’s eating away at the economic body.

The following chart on real wealth versus paper wealth is a little dated. However, it serves to highlight (again) a disconnect with reality in 1980.

The dotted purple line is the volume (billion tons per annum) of total global raw material extractions.

The red line is the value (in US dollars) of global GDP (economic activity).

Prior to 1980, the two lines closely correlate with each other.

Everything we use in this world is traced back to commodities. The desk we sit at, the chair we sit on, the TV we watch, electricity, food, motor vehicles, ships, trains, petrol, clothing and the list goes on and on.

Therefore, it’s reasonable to assume economic activity (GDP) should be linked to our usage of raw materials.

But since 1980, there’s been a disconnect between what we extract, and the activity generated.

The abandonment of the gold standard in 1971 put in place the ability for the one thing that CANNOT be sourced to a commodity...printing money from thin air.

Money creation and fractional banking sowed the seeds for the financialisation of the global economy.

Institutions that are deemed ‘too big to fail’ tells you how successful this process has been.

The ‘wealth’ hot-air balloon has floated higher and higher. Terra firma (the earth and its raw materials) is becoming a distant speck.

Derivatives. Swaps. SPACs. LBOs. CFDs. Home equity loans. Lo Doc lending. Negative yielding bonds.

These are the wealth creation vehicles of the 21st century…but they are all artificial. They only have value while people, in sufficient numbers, buy (or more to the point, borrow) into the illusion.

Icarus learnt a painful lesson in gravity when he flew too close to the sun.

My guess is the same fate awaits the wealth balloon — filled with the hot air of central bankers, politicians and ‘too big to fail’ banks.

The atmospheric pressure at higher altitudes is vastly different to those on Earth.

These altered and very dangerous conditions are why previous wealth balloons (debt crises) have all ended with a bang.

But none of these previous balloons ever flew so high for so long.

The thud back to earth will make a laughing stock of those who predicted the balloon can float higher and higher forever.

Unfortunately, Earth’s gravitational pull will also be a financial disaster on an epic scale for those who failed to apply a degree of common sense on the sustainability of this artificial wealth.

When this happens, one of the questions that’ll be asked in the cold light of day will be…

What have we done to ourselves and the following generations?

Regards,

Vern Gowdie,
Editor, The Rum Rebellion

Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.

US’ Poor in the ‘Paradise’ Ahead
By Bill Bonner

All we have left is mockery. But in the US, circa 2021, our sarcasm is dwarfed by the absurdities of real life.

Last week, we tried to mock the Biden administration’s conceits. No bridge is too far for the Biden team…even those built by god himself.

Alas, our sarcasm fell short. Scarcely had the ink dried on our April Fools’ issue, that Team Biden came out with more claptrap…leaving our cynicism far behind.

Here’s The New York Times: ‘Biden Seeks to Use Infrastructure Plan to Address Racial Inequities’.

‘…President Biden’s $2 trillion plan to rebuild aging roads, bridges, rail lines and other foundations of the economy comes with a new twist: hundreds of billions of dollars that administration officials say will help reverse long-running racial disparities in how the government builds, repairs and locates a wide range of physical infrastructure.

‘That includes $20 billion to “reconnect” communities of color to economic opportunity, like the Black residents still living in the interstate’s shadow along Claiborne [Avenue…In New Orleans].’

Oh yes…

Can you imagine it, dear reader? We can’t. Not only do you need an extreme talent for mockery to make fun of the Biden team, you need a remarkable imagination to see how its fake money could cause a real boom…or how its boondoggles could help anyone but the elite, the insiders, and the cronies who control the money.

The elite excuse

To bring readers fully into the picture…at least as we see it…government is always an excuse for the few — the elite — to lord over the many. They use government to keep the power, the money, and status headed their way.

In that regard, ‘racial inequalities’ are useful.

There are two broad explanations for why some groups are richer than others. 1) It is their own fault…if they acted more like rich people — studying hard, saving their money, etc — they’d soon be rich themselves. Or 2) It is the fault of other people…‘racists’ who hold them down and squeeze the air out of them.

For the elite, the second hypothesis is much more attractive than the first. It is easier to understand. The problem is easier to fix. And it gives many people a satisfying sense of indignation. After all, they’re not like those rednecks down in Georgia!

Most important, it offers the cronies and insiders an almost infinite range of opportunities to rip off the little guy. Today’s elite uses the poor the way the Bolsheviks used the proletariat — not as a cause, but as a tool, to help them gain power for themselves.

Like the war on drugs…or the war on COVID-19…or the war on terror, there is little hope that a new ‘surge’ in the war on poverty (by reconnecting poor areas to economic opportunity) will help the public (black or white).

But it is a great boon to the elite (black and white), who administer its many programs, spend its billions of dollars, and thus attain power, status, and money for themselves.

The diversity issue

Here’s how it works. Bloomberg TV recently hosted its fourth annual ‘Inequality Summit’. Speaking on ‘diversity targets’ was Kenneth Chenault, a Harvard Law School graduate…and former CEO of American Express. Mr Chenault, an ‘African American’, says progress at getting more ‘diversity’ on corporate boards has been disappointing.

But who gets on a corporate board? A poor person? One of the forgotten little guys? Nope.

What they want is a person like Kenneth Chenault…that is, one of the elite, an ‘African American’, who went to the same schools as the white directors…and someone who, therefore, acts like a rich person. Not the high school dropouts from the wrong side of Claiborne Avenue, in other words.

Another example: Corporate boards are told it would be good PR to let non-white firms handle some of their investments. This too, is advertised as a victory for ‘diversity’.

But who are these money managers? Not the homies from West Baltimore. Today’s Financial Times includes a portrait of one of them, John Rogers, the founder of Ariel Investments.

Where did Rogers go to school? Princeton!

Does this token do-goodism really help the poor man? Not at all, it just uses him…a useful excuse for more elite plundering.

The multiplier effect

As we saw last week, the ‘multiplier’ effect used to mean that the feds could spend money — say, on interstate highways — and the country would ‘get back,’ in the form of increased GDP, some four or five times its money.

We doubt that that was exactly cause and effect, but that’s what happened.

But today, the debt burden is so high…and each new dollar expended is financed with more printed money and more debt…and the economy is so mucked up with false price signals, thanks to the Federal Reserve’s merciless suppression of interest rates…

…so that now, when the feds spend money, the GDP return — according to a study by Lacy Hunt of Hoisington Investment Management — is negative. That is, each dollar spent by the feds subtracts about $1.20 from GDP over the next three years.

The more the feds meddle — with regulations, debt, price controls, and ‘infrastructure’ pork — the more economic damage they do. So, if the US’ honcho, Joe Biden, were actually to enact his new $2.3 trillion ‘infrastructure’ program to ‘address racial inequalities’, we could expect GDP to contract by about $2.8 trillion by 2024.

Let’s see…contracting output? Increasing money supply? What does that imply? Inflation!

And who would suffer most?

The ‘diverse’ people on corporate boards? The directors of ‘anti-racism’ programs? The politicians who vote for the boondoggles…or the apparatchiks who implement them?

Nope. The rich and powerful will be fine. They know the game. They have 535 members of Congress looking out for them, and 11,524 registered lobbyists on the payroll. They also have sophisticated financial advisors who will help them protect their capital.

Besides, the feds will pump up their stocks and real estate.

But the poor? They have only their meagre incomes. And as prices rise, they will feel pinched…and betrayed.

The Russian Revolution overthrew the existing elite to put a new elite in command. They promised a ‘worker’s paradise’. But while the new elite prospered, the workers had to endure a dreary slavery for the next 70 years.

So, too, we predict…that the US' poor — black and white — will suffer more or less equally in the paradise ahead.

Regards,

Bill Bonner,
For The Rum Rebellion