Marc Faber: Inflation or Deflation ?

Marc Faber is interviewed by Lauren Lyster's Capital Account on Russia Today on the 3rd of April 2012.

Marc Faber says inflation in money and credit can cause bubbles, but it is hard to know where they are, and it is not easy to know where inflation is taking place. He also notes that governments hide inflation and much of that inflation goes into asset prices. We do not know exactly how much the Federal Reserve, the ECB, the BOJ, etc. are propping up the prices of stocks, commodities, etc. We can only estimate. The money printing and loose language of the central bankers and policy makers around the world certainly does distort the price mechanism, however, and Marc Faber is not optimistic about the ramifications of these actions.

He also mentioned the quadrillions in derivative, and that derivatives bubble will eventually collapse and lead to massive wealth destruction.

When asked to give advice to young people in their 20s and 30s, he referred to his generation and how it was easy to get a job at the time, but since the collapse of communism and the advance of the internet, 3 billion persons entered the world economy and western youngster have a lot of competition by young people living in developing economies, so he just think young people should lower their expectations and people in the western world should change their mentality and reject the nanny state.

 The interview starts at 3:18.

The Next 20 Years: Inflation vs Deflation

Steve Keen, an Australian economist and contrarian strongly opposed to neo-classic economists views, has recently posted an article entitled "Economics without a blind-spot on debt" where he discusses the importance of private debt during the great depression and now.

He managed to gather the data for aggregate private debt in the US and Australia and drew the result in the chart below:

There was a debt bubble in the 30s which led to the great depression, and now it appears we have the same kind of bubble, only more pronounced. The main difference is that now we live in a world of fiat currencies and what happens next is highly depending on monetary policies.

I encourage you to read his blog post for details about private debt. I'm going to focus on 2 scenarios:

• Deflation where the central banks do not really fight the debt deflation (or debtflation).
• Inflation where the central banks decide to keep the aggregate private debt constant and works thru the years via inflation.

If we consider 150% of GDP to be a normal level of aggregate private debt then the debt bubble started around 1987 and peaked in 2010 (a 23-year debt increase). Historically, bubbles have a tendency to be somewhat symmetric, so in the case of debt deflation let's assume it to last 23 years that is until 2033, or about 20 years from now.

In this scenario, there would be massive deflation, and, in theory, the preferred asset would be cash (under the mattress) and many companies and banks would have to go bankrupt, but in reality, the system would probably have to collapse, and I'm not so sure what the value of cash would be. This is the kind of scenario envisioned by Robert Prechter who sees the Dow Jones at 1000 USD.

The other scenario (flat private debt to GDP ratio) would assume massive money printing. Let's assume somehow the federal reserve can keep this ratio constant by printing money during 23 years. If the GDP growth is flat, it would require about 3% (extra) inflation per year. However, during that period, there is actually a good chance of negative growth because Peak oil consequences will be in full effect unless we find some energy alternatives. This also excludes public debt and unfunded liabilities (about 100 trillions USD or 600% of GDP) which would require inflation north of 10% to get monetized.

If you think the US is in bad shape, just look at the aggregate private debt in the UK in the chart below. This country (and the British pound) are going to have a very rough time in the years and even decades ahead, as its private debt stands at 450% of GDP.

You may also want to read "Currency Crisis:Why is the British Pound a doomed currency ?" for a more detailed analysis of the United Kingdom debt and upcoming GBP currency crisis.

Marc Faber November 2011 Market Commentary

Marc Faber has just released his November 2011 market commentary on his gloomboomdoom.com website.

This month report is entitled "The Strongest Principle of Economic Development Lies in Human Choices".

There are 2 attachments to the monthly market commentary (MMC) :

• The Missing Chapter - A Personal View of Russia - Twenty Years After by Eric Kraus, Managing Director of Anyatta Capital
• The Inflation Pulse Returns and Implications on the Fall Melt-Up of 2011 by Michael A. Gayed, Chief Investment Strategist at Pension Partners, LLC

The first attachment can be accessed at "The Missing Chapter - A Personal View of Russia - Twenty Years After" and you can download the PDF at the end of the linked article. In this chapter, Kraus discusses about Russia before the 1997 collapse and the corruption that took place at the time and how it has now improved and that Moscow feels the freest place in Europe.

The second attachment refers to "Inflation, Deflation And The Fall Melt-Up of 2011" article on Seeking Alpha where Mr. Gayed explains how to navigate the markets which consistently changing market sentiments from deflation to inflation fear and vice-versa. He uses the price ratio of the Treasury Inflation Protected Bond ETF (TIP) relative to nominal 7-10 Year Treasuries (IEF) to anticipate sentiment.

I'll try to post highlights of the Gloom Boom Doom market commentary a bit later.