Dr Marc Faber: The Terminal Phase of a Credit and Asset Bubble

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In the gilded ballroom of Hyatt’s Savoy ballroom, World War D‘s opening speaker Dr Mark Faber delivered a blunt message: the old world order is over.

The US reached a peak in prosperity and influence in the world in the 1950s or 1960s,’ said Faber. But since the 70s the superpower has been locked into a cycle of bubbles, busts and growing debt.

Debt, and the way it has manipulated the global economy, was the main theme of Faber’s address.

There are some people who claim to be economists who will tell you debts do not matter,’ Faber told the packed ballroom.

But the real story is different….

Faber explained the flaw at the heart of expansionary monetary policy (such as QE). ‘When you drop dollar bills into the economy…it won’t lift all prices and assets equally at the same time,’ he said. In the 60s and 70s, extra money flowing through the economy inflated wages; in the early 2000s, money printing inflated commodities. But, Faber points out, this price and asset growth is never equal.

In other words, money printing creates more bubbles. Some assets go up, they overshoot, collapse and cause significant damage which necessitates, in the view of the US Federal Reserve, more money printing. It is a vicious cycle we’ve seen since the 70s: each time there was an economic problem, the Fed printed money and created more distortions.

Bernanke’s tenure saw this trend continue, and when it came to assessing the former Fed chairman, Faber didn’t mince his words.

He’s been a disaster,‘ Faber said drily. Faber pointed out that not only did Bernanke not notice the subprime disaster, he actually helped create it. ‘Under his tenure at the Federal Reserve and under his intellectual influence when working for Mr Greenspan they created the gigantic housing bubble,‘ he said.

At the heart of this expansion in debt, and cycle of bubbles and busts is the reliance of the US economy on consumption. For the last century, policy makers have encouraged consumption on all levels of society including government, and discouraged savings.

But according to Faber, consumption doesn’t create a strong economy. ‘Wealth doesn’t come from consumerism, it comes from capital spending,‘ he said.

And the problem for the US economy is that while debt has continued to rise, capital investment hasn’t. In fact, it’s been falling sharply for a long time.

If we have growing debts, there’s a difference in quality of those debts,‘ he said.  Japan, South Korea and Taiwan used their debts to invest in factories, plants…investments that generated wealth. According to Faber however, the US has just acquired debt to fuel consumption. ‘Where’s the future income?‘ he asked.

Faber used this as an opportunity to strike a note of caution for Australia, warning the room that one day Australia’s indebted housing sector won’t be able to borrow much more. It will then enter a period of contraction or very slow growth.

That was his warning to Australia: then came the opportunity.

We live in a new word. We live in a world where the balance of power has shifted to emerging countries,’ said Faber.

He was of course, talking about China. While China’s growth story is well known, Faber gave the audience an important geopolitical sub story.

China’s massive growth triggered massive commodity export booms in emerging economies. China’s real success was exporting the products it produced back to emerging economies. This has created a significant shift in the global economy: exports from China to emerging countries are higher than exports to the US or Europe.

‘This is the new world, where the old world is largely bypassed,’ said Faber.  While most of the media debates whether the US will grow, Faber argues it will have no impact on the world, as China has a much greater influence now than the US.

Faber is no bull on China however, and warned he would be very careful about investing there. Faber sees conditions at the present time as much worse than many people realise. There are also geopolitical concerns that are often left unexamined.

Take oil. Oil consumption in China – most of which comes from the Middle East – will rise. ‘The Middle East in my opinion will go up in flames at some point, that will be an unpleasant event,‘ predicted Faber in his typically apocalyptic but still understated way.

For Australia, he sees opportunities in the huge numbers of Chinese tourists travelling abroad, but he believes Australia has made a huge mistake by tolerating US bases on its continent. ‘China will not sit by and let themselves be bossed around by the US,‘ he said.

His final message reiterated the failure of the US Federal Reserve. Corporate profits had been boosted by artificially low interest rates; wealth inequality is on the rise; and to compound it all, he says the Fed won’t raise interest rates anytime soon.

Punctuated by flashes of humour and dire warnings, it was a sober message that the attentive audience lapped up.

Reprinted with permission from Money Morning.

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