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Marc Faber and Mish on Inflation, Deflation, Doom and the End of Civilization

     

Gloom Boom & Doom Report publisher Marc Faber and economic analyst Mike “Mish” Shedlock join Yahoo’s Tech Ticker on March 12, 2010 to discuss the global economy, where we’re headed and the possibility of the “end of civilization.” (Videos follow excerpts and commentary)

Marc Faber and Mish hold differing views on what we can expect in terms of dollar purchasing power going forward:

Marc Faber:

The issue here is quite irrelevant, whether we have deflation first or inflation first. Eventually we’ll have much higher inflation rates, because if deflation comes first they’re going to have even more stimulus packages and even more printing. And as you know, many leading economists, they call for additional stimulus which I think is ludicrous, it’s crazy to even suggest additional stimulus. But, that is what the Keynesians believe is the right thing to do and that will bankrupt Western governments, not just in the US, but everywhere.

Mish:

I think he’s wrong. One thing he’s right about is that the threats from Congress here, the stimulus packages. Yet, when I look at this I see what state governors are doing, I see what mayors of some cities are doing, and I am also seeing out of Congress a reluctance to pass more stimulus bills. Look at the last unemployment extension – it was held up for a week by Bunning – where they didn’t even want to extend unemployment benefits. There’s very little room here and very little sentiment here for Congress to go out and do these same massive kinds of programs. Also, I think that these guys think that they fixed the problem. That they think we’re on this road to this miraculous recovery and jobs are coming just down the pike.

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Both Faber and Shedlock make excellent points here, and what the inflation/deflation debate seems to boil down to is what Congress, the Fed and the administration will do going forward.

It is clear that we are currently in a broader deflationary trend. This is evidenced by what happened with the stock market crash, including commodity prices like oil, copper and even gold, in late 2008 through early 2009. Credit collapsed during this time period – across the board. Essentially, bad debts were being cleared out of the system, just as nature intended. In March of 2009, the Fed and Congress began pumping trillions of dollars into the system in the form of bailouts, stimulus packages, and buyer incentives. This put a floor on the deflationary impact across all asset classes and led to a manufactured rise in those asset classes (arguably inflation) from March 2009 through today.

If the powers that be were to pull all stimulus and monetary expansion right now, it is evident what would happen to all asset classes, save precious metals; a re-collapse in values. Thus, the future is going to be dependent on what Congress and the Fed do going forward.

As Mish suggested, our elected representatives may very well believe that we have recovered and it’s smooth sailing going forward. This is one major reason we may be seeing the Fed and Congress pulling back on more talk of stimulus and spending our way out of recession – because it is now over!

If they are wrong about recovery, which we strongly believe is the case, then the sentiment in our government and quasi-government institutions will change. As we saw in late 2008, when the SHTF people get very irrational, they are no longer driven by logic, but rather, fear. When the system was on “the brink,” as suggested by then Secretary of Treasury Henry Paulson, Congress acted out of fear of the potential for “martial law” across America if the system collapsed, and thus the trillions in spending was justified.

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Never let a good crisis go to waste is the motto of our present administration. If we were to see a relapse in the housing meltdown and a crash in stock markets, those in charge may very well respond irrationally and do what they did in 2008. Keynesians believe, after all, that the reason the Great Depression of the 1930’s wasn’t prevented is because we failed to spend enough money. They will not make the same mistake in this crisis.

We, therefore, agree with Marc Faber’s long-term position in terms of the deflation/inflation debate. What happens in the short-term, with irrational responses coming from the government, our financial institutions and investors, is really irrelevant, as the long-term trend of dollar destruction is still intact. Prepare for inflation, maybe not today, or tomorrow, or even this year, but five years from now, expect a significant rise in your cost of living, especially related to commodity-driven prices like gas, food and electricity. And, as has been the case since the Fed’s creation in 1913, do not expect wages to keep up with this trend of rising prices, meaning that as prices in essential goods go up, your wages will not keep up, meaning that over time, you will get poorer.

In the end, it seems Dr. Faber and Mr. Shedlock agree on the most important aspect of this debate, that we are not in a recovery in any sense of the word:

Mish: They think we’ve turned the corner. I don’t think we’ve turned the corner. I think more damage is coming.

Faber: I think it’s beyond repair. It’s too late.

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Rather than leaving you with the gloom and doom, here are some thoughts from Faber and Shedlock on how you can prepare for the destruction to come:

Faber: My belief is that you have to accumulate, slowly, some gold every month. Put some savings into gold. If I were living in the US and I couldn’t leave the US, I would build up some assets outside the United States. I would own some property outside of major cities because I believe that the major cities are becoming very dangerous in terms of modern warfare, so you have to become self-sufficient.

Mish: I think the day of reckoning has arrived. The question is how long it takes to play out. Certainly wages in the United States have to drop and wages in Asia have to rise. I think we have the first generation here in the United States where our kids are going to be less affluent than their parents. It has to happen here right now.

Learning to do more with less is the new paradigm shift in America. Out-of-control spending by consumers will stop, either voluntarily or by force as credit, jobs and wages continue to contract. This negative feedback loop will continue to spiral downward as our economy essentially becomes unhinged.

For those losing their jobs or making less money, growing your own food in a micro-garden in suburbia, or repairing kids’ clothing, or fixing your own car will be just some of the skills that are necessary going forward.

The best investment you can make for what is to come is in yourself.

Marc Faber: Don’t Expect Another Crash…Bernanke Won’t Allow It (Part 1 of 3)

The Great Inflation / Deflation Debate (Part 2 of 3):

Faber and Mish: We’re Doomed and Washington Can’t Do Anything About It (Part 3 of 3):

Reprinted from SHTF Plan.

April 6, 2010

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