Dr. Marc Faber the Swiss fund manager and Gloom Boom & Doom editor has been reacting to the announcement Thursday of a third round of quantitative easing by the Federal Reserve.
He sees the Fed’s action as ludicrous, leading to higher asset prices benefiting the wealthy while the man on the street faces higher cost of living and more job losses. He likens big government to a cancer taking away people’s freedom and says the US is facing a fiscal Grand Canyon with never ending deficits. Speaking to CNBC‘s Worldwide Exchange today, Faber said: "This time it’s not only QE3, it is unlimited QE going on forever," with the Fed buying mortgage- backed securities and continuing operation Twist.
What are the consequences of QE forever?
"Asset prices will go up and the money will flow to the Mayfair Economy," he said, defining the latter as an "economy of the rich people whose assets prices go up and whose net worth increases" without any trickle down benefit to the real economy.
What you have is a small economy that is booming and the majority of the economy is being damaged by QE, Faber explains.
If you have very expansionary monetary policies, you actually encourage the expansion of government, then the fiscal deficits, the transfer payments etc…"We’re not facing a fiscal cliff, we’re facing a Grand Canyon, with never ending deficits," he reckons.
As the U.S. government heads into its fourth year of trillion-dollar-plus budget deficits amid on-going Congressional wrangling about taxes, it is likely to hit a threatened “fiscal cliff” in the form of a US$16.4 trillion self-imposed borrowing limit later this year or in early 2013, potentially forcing it into default unless Congress agrees to raise the debt ceiling – a contentious issue in this presidential election year.
The Federal Reserve said Thursday it will expand its holdings of long-term securities with open-ended purchases of US$40 billion of mortgage debt a month, as it seeks to boost growth and reduce unemployment, and would likely hold the federal funds rate near zero “at least through mid-2015".
It will continue its program to swap US$667 billion of short-term debt with longer-term securities to lengthen the average maturity of its holdings, an action dubbed Operation Twist. The central bank will also continue reinvesting its portfolio of maturing housing debt into agency mortgage- backed securities.
Supply side vs. demand boost
"The whole mandate of the Fed to boost asset prices and then to create wealth is ludicrous, it doesn’t work that way," stressed Faber, adding that it may boost spending temporarily, but "the collapse thereafter is even larger".
"Any further quantitative easing from the Fed, in whatever form, will only make our next economic crash that much more serious," agrees Ron Paul in a statement issued last night.
If you want to have an expansionary monetary policy, I would go as far as sending each household a check for US$10 million free as a gift, and put this on the balance sheet of the Treasury and the Fed, said the Gloom Boom & Doom publisher.
It would boost consumption temporarily, reckons Faber but in the longer term "no country has become rich from consumption; it’s capital spending that leads to riches."
"For all of its vaunted policy tools, the Fed now finds itself repeating the same basic action over and over in an attempt to prime the economy with more debt and credit," writes Ron Paul, adding that "this latest decision to provide more quantitative easing will only prolong our economic stagnation, corrupt market signals, and encourage even more misallocation and malinvestment of resources."
In the austerity versus growth pseudo debate, one is reminded that if money printing was a panacea, Zimbabwe ought to have been an economic powerhouse and if government spending was a miracle cure, then Greece ought to have been the most successful eurozone economy.
Who got us there?
Faber sees the Fed’s monetary policies over the last 15 years as mainly responsible for the various asset bubbles (Nasdaq, real estate etc…) leading to the subprime crisis in 2007. "The money printers and the neo-Keynesians interventionists are responsible for the crisis, reckons Faber, and people should know this."
"Mr. Bernanke and Fed governors appear not to understand that our current economic malaise resulted directly because of the excessive credit the Fed already pumped into the system," adds Ron Paul.