Central Banks’ New Alarming Beliefs

Wednesday, 22 January 2020
Adelaide, Australia
By Bernd Struben

  • Markets
  • Central banks’ diversion

The God-like belief by central bankers in their ability is as amazing as it is alarming.’

Vern Gowdie, The Gowdie Letter

The world owes its central bankers a great debt.

Literally.

Thanks to the inexorable slide in global interest rates, public, private and corporate debt have reached levels unthinkable just a few decades ago.

If you leave the lid to the candy jar open, after all, you best brace for the sugar high. And eventual comedown.

So just how much candy have we helped ourselves to?

Globally, public debt reached US$64 trillion (AU$93.5 trillion) last year. That’s according to the Organisation for Economic Cooperation and Development (OECD).

But it’s not just governments that have been overloading on cheap money. The private sector’s racked up even more debt. A whopping US$70 trillion (AU$102.2 trillion) worldwide.

The US, the world’s largest economy, is still taking on debt at record rates. Though as The Gowdie Letter’s Vern Gowdie reminds us, you can trace this trend back some 60 years.

In inflation and population adjusted terms, US debt has increased nearly sixfold over the past 60 years.’

As it stands, every man, woman and child in the US would have to pay US$227,000 to wipe the slate clean.

Australians haven’t been shy about dipping into the easy money jar either.

The Australian Debt Clock puts total government debt at $1.1 trillion. And total household debt at $2.6 trillion.

Add in private credit and the total Australian credit bill comes in at an astounding $7.5 trillion. Give or take a few billion.

That’s $7.5 trillion of future spending Aussies have chosen to bring forward. Money that, conceptually at least, will someday need to be repaid.

No surprise then that ANZ’s head of Australian economics, David Plank, forecasts a decade of sluggish growth ahead.

From The Sydney Morning Herald:

ANZ said the 2020s were likely to endure the slowest rate of growth since the 1980s…

Australian households, despite record levels of wealth due to high house prices, were carrying record levels of debt that would crimp their spending plans…

“In the coming decade, growth in household consumption will face a structural constraint, on account of high household debt and the lack of room for the cash rate to be moved much lower.”

Perhaps the most disturbing takeaway here is that Australians’ record levels of wealth are tied directly to high house prices. The same high house prices that are driving record levels of household debt.

We had a small taste of the panic a slumping property market could unleash in late 2018. Three rate cuts from the RBA and various homeowner incentives from the government turned that slump around.

But with the official cash rate already at a bargain basement 0.75% the RBA is almost out of fire power to entice more ‘greater fools’ into the property market. And the government has its own debt issues.

When house prices take a truly deep slide today’s perceived record levels of wealth from inflated property prices will evaporate. Yet the crushing debts will remain.

And if ‘stubbornly low’ inflation reignites, banks will have no choice but to up their interest rates. And then…

Well, you do the maths.

Now, to the markets.

Markets

Overnight, the Dow Jones Industrial Average closed down 152.06 points, or 0.52%.

The S&P 500 closed down 8.83 points, or 0.27%.

In Europe the Euro Stoxx 50 index closed down 9.91 points, or 0.26%. Meanwhile, the FTSE 100 lost 0.53%, and Germany’s DAX closed up 6.93 points, or 0.05%.

In Asian markets Japan’s Nikkei 225 is up 120.94 points, or 0.51%. China’s CSI 300 is down 0.28%.

The S&P/ASX 200 is up 67.35 points, or 0.92%.

West Texas Intermediate crude oil is US$58.34 per barrel. Brent crude is US$64.59 per barrel.

Turning to gold, the yellow metal is trading for US$1,556.98 (AU$2,273.63) per troy ounce. Silver is US$17.78 (AU$25.96) per troy ounce.

One bitcoin is worth US$8,690.78.

The Aussie dollar is worth 68.48 US cents.

Central banks’ diversion

Alarmists always demand the same thing: absolute power to dominate, transform and control every aspect of our lives. We will never let radical socialists destroy our economy, wreck our country or eradicate our liberty.

Donald Trump, in Davos

Staying with central banks, it’s not enough for their boffins to create asset bubbles in real estate and global stock markets.

Now they’re lining up to join the climate alarmists. Apparently meteorology also falls within their area of expertise.

From The Australian:

The world’s most powerful central banks have issued a stark warning that climate change could trigger the next financial crisis, as a “disruptive” shift in asset prices sparks an unpredictable “green swan” event and potentially leaves some economies unviable.

In an expansive new report, the Bank of International Settlements has warned that central banks around the world risk becoming “climate rescuers of last resort”…

To avoid such a catastrophe, the BIS has urged central bankers to “be more proactive” in pushing politicians and government to grapple with the necessary transition to a greener economy, labelling a global tax on carbon a “first-best solution”.

Among the rumours making their way around the mainstream media, the RBA may…in future…step in to buy distressed carbon heavy assets. Like coal mines.

I imagine free marketeers and climate warriors alike can think of better uses for their tax dollars.

Now Treasurer Josh Frydenberg already threw cold water on that idea. But the Australian government can and will change. While the globalist push for world government isn’t going anywhere soon.

As Trump pointed out at the World Economic Forum currently underway in Davos, the alarmists are looking to ‘dominate, transform and control every aspect of our lives’.

Free market be damned.

Knowing Vern’s, erm, affinity for central bankers, I asked him his take on the BIS foray into climatology.

Here’s what he wrote back:

The next credit crisis will be caused by a change in climate.

The sunny disposition of investors will be replaced — as it always is — by the chill of a market in free fall.

This seasonal change will have everything to do with stratospheric debt levels and nothing whatsoever to do with CO2 levels in the stratosphere.

In looking to blame climate change, the BIS is creating a diversion away from the economy’s real polluters…central banks and their obsession with the “fossil fuel” that powers the global economy…debt.’

We’ll leave it there for today.

Vern’s currently recording a video series on…among other things…central banks and the historic market crash he sees them creating. Along with some vital escape routes available to investors who see the writing on the wall.

Keep an eye out for that towards the end of next week. I’ll be sure to remind you too.

Cheers,
Bernd