When it Comes to Debt, we are Already Morbidly Obese

How good is your memory?

Let’s go back to December 2015. Can you remember the big news at the time?

The oil price plunged through the US$30 a barrel level.

Popular thinking at the time was that paying less at the pump would be good for the economy.

The theory was that, with more dollars in their pockets, consumers would increase spending.

At the time, my response was that, without wages growth, this theory on economic growth does not translate into reality.

Consumers can only spend or save what they earn and/or borrow.

A household with a weekly income of $1,000 might save $20 at the pump. They then spend that $20 on some treats.

However, it’s still a zero-sum game…$1,000 went into the economy. No extra.

The end result of the reduction in the price of fuel was a redistribution of household income.

There was no material boost to the overall economy.

Absent wage increases, the only thing keeping our GDP readings in the positive is the willingness of households to go deeper and deeper into debt.

The hundreds of billions of borrowed dollars has created the illusion of a recession-proof economy. Unfortunately, this is an illusion that too many have bought (or more to the point, borrowed) into.

It takes a little while for fact to trump fiction but, in the end, reality always wins.

In April 2017, ABC News published a story titled: ‘Australia’s household debt crisis is worse than ever as bills pile up and wages flatline’.

This is an extract:

Martin North is the principal of financial research firm Digital Finance Analytics. He crunched the numbers and calculated that, in March [2017], of the 3.1 million mortgaged households, around 22 per cent were in “mild mortgage stress”.

That’s up 1.5 per cent on February, and is directly related to the even the smallest of interest rate increases by some of the big four banks.

That means those households are managing to make their mortgage repayments, but only by cutting back on other expenditure, or putting more on credit cards, and generally hunkering down.

Then there are those Australians under extreme levels of financial stress.

Data from Digital Finance Analytics show 1 per cent of households are in severe stress.

That means they’re behind with their repayments, and are trying to dig their way out by refinancing, selling their property, or seeking help from services like the National Debt Helpline.

When you’ve borrowed excessively, even the smallest of interest rate increases acts like a vice.

When this happens, more income is diverted to rising fixed costs — mortgage, electricity, rates, and so on — and less to discretionary spending.

Without an increase in household income, money is merely redistributed.

The human and financial costs of our so-called economic success are starting to come into focus.

Our wanton past is catching up with us.

Debt is future consumption brought forward. We have either reached, or are fast approaching, the stage where we cannot borrow excessively from the future anymore.

It is time to pay the bill we’ve run up and/or begin the default process.

The cracks are starting to appear in the discretionary spending section of the economy.

From yesterday’s The Australian:

The nation’s fragile retail sector is already in recession, according to National Australia Bank chief economist Alan Oster, and this could drag the economy down as anxious consumers rein in spending on discretionary goods such as fashion and apparel.

Mr Oster described retail as being in a “terrible’’ state, and although NAB is forecasting retail trade figures to show a 0.3 per cent bounce for April when the Bureau of Statistics releases the latest data this morning, there are growing concerns it could miss and post a decline.

NAB’s snapshot of spending habits across customers reveals fragile consumer confidence underlining the recessionary conditions now swirling through the retail sector, with March quarter spending patterns revealing retail trade among the worst-performing sectors.

What do you think the prospects are for a wage increase for the 1.3 million Australians employed in the retail sector? ‘Buckley’s and none’ comes to mind.

What do you think the prospects of job losses are? Much higher than they were a couple of years ago…especially with Amazon coming to town.

For an economy to contract, it only has to happen at the margin.

Employees in the retail sector feel the pinch. They rein in spending. For example, they may cancel or reduce their insurances. The insurance sector then starts to implement wage freezes and redundancies. And so it cascades through the various sectors of the economy.

Even those protected species in the public sector are not safe.

If the private sector is struggling, the government can only flog the horse so much.

If consumers do not have the capacity to pay any more to Caesar, then, guess what?

Caesar’s got to make some adjustments to the numbers and/or take on more public debt.

The only thing keeping the illusion of our economic miracle alive is the wealth effect.

While property prices and superannuation balances remain artificially high, the mood remains (somewhat) positive. On balance, people have sufficient faith in the spin of ‘be patient, normal growth will resume shortly’.

You have to be a supreme optimist, or living in a cave, to think wages growth is on the horizon anytime soon. For the record, this observation on wages growth excludes the privileged few in the executive suites.

Technology and globalisation have consigned annual wage increases to history.

In this highly-competitive environment, every household cannibalises the job of their neighbour. Everyone is looking to make their dollar go further. The process feeds on itself.

Without wage increases, the only way to grow the economic pie is with more debt.

It’s possible to stretch debt’s ‘waistline’ a little more. Loosen the belt a notch or two.

But, in debt terms, we are already morbidly obese. The world has racked up something north of US$220 trillion in debt…over 300% of global GDP.

In all of history, we have never come close to tipping the debt scales at this level.

Something has to give.

How does this end?

In a word…badly.

There can be no good outcome from a situation that’s duped people into believing they can live beyond their means without any serious repercussions.

This is the Peter Pan world the central bankers have created. People have been conditioned to believe the government or the Fed will not let anything truly bad happen to them.

A blind adherence to an economic growth model based solely on debt-funded consumption has progressively set people up for massive failure.

At some point, investors must realise that without continued debt accumulation, the illusion will be over. When that happens, markets will cannibalise themselves.

The bursting of the greatest credit bubble in history is going to get very ugly.


Vern Gowdie,
Editor, The Gowdie Letter

Editor’s note: You can read more about Vern’s dire warnings for Australia, and crucially, what you can do to protect your wealth and even profit from the coming collapse he forecasts, here.

Vern is a contributing editor to Money Morning — Australia’s biggest circulation daily financial email. (To have Money Morning delivered straight to your inbox you can subscribe for free here).

Vern 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 5 financial planning firms in Australia.

Vern 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. In his leisure time Vern remains active with triathlons and pilates.

Money Morning Australia