Transcript for the podcast: Marc Faber: The Perils of Money Printing’s Unintended Consequences
Chris Martenson: Welcome to another www.PeakProsperity.com podcast. I am your host, of course, Chris Martenson. And, today, we’re speaking Marc Faber, publisher of the Gloom, Doom, Boom Report, bestselling author, and one of world’s best-known macroeconomic thinkers. Marc is a return guest on our podcast series. We spoke with him over a year ago and we’re delighted to catch up with him again now that so much has happened in the intervening time. Marc it’s a real pleasure to have you back as our guest.
Marc Faber: It’s my pleasure to be a guest.
Chris Martenson: Well, let’s jump right in. What are the implications of the recent Greek default announcement? How does this inform your greater assessment of the macroeconomic picture?
Marc Faber: Personally, I think that the Greek issue has been completely overplayed and misinterpreted. The climax of the Greek issue was in, say, October/November of last year and everybody was very bearish on what happened because of the bailout of Greece. And the market’s rising very strongly: we have more than 25% from the October 4th low when the S&P was at that one thousand and seventy-four. So I think that the Greek issue is not market determining. In other words, the market focuses on other issues that are more important.
Chris Martenson: So it’s not a big issue because of the amounts involved or because it’s already been priced in or why is it not an issue?
Marc Faber: It’s been priced in because, don’t forget, from the March 6th lows at one thousand and something on the S&P, one thousand and sixty-six – no sorry- from the March lows at 666 on the S&P we went up to 1,370 on May 2nd, 2011. Then we dropped to 1,074 on October 4th and then we rallied again. So the drop from 1,370 in May 2011 to the low in October of 1,074 already discounted the problems in Greece.
Chris Martenson: I’m not a huge believer in holding of stocks in general, equities at this point. I think you’ve noted that equities would be a good place to maybe survive or hide out from the coming inflation. So if we’re looking to preserve our purchasing power against inflation in the future and I want to get to some other data around that in just a minute. I’m interested in your rationale for being in the stock market at this particular point in time. You’ve also noted recently that you think that there’s rough times coming ahead that maybe equities are overbought. What’s your general position on the stock market right now?
Marc Faber: Well, basically I mean the stock has arisen very significantly and we’re up more than a hundred percent from the March 6th, 2009 lows. So we’re no longer oversold or undervalued. We’re fairly valued if you take current earnings. But the problem is that may be earnings are inflated and that earnings will decline. And, so maybe the prospect for stocks are not particularly good. Equally, if you look at different asset classes, say you take real estate, equities, bonds, corporate bonds, government bonds, commodities, what is the best place to be in a disaster scenario? In my view, probably by being in equities you will not lose everything. You will lose maybe thirty, forty percent, who knows, in a disaster scenario. But in government bonds you may lose everything because governments may default. So all I’m saying is the more bearish you are about the world, about social conditions, geopolitical conditions, the more actually you should be aiming at equities because companies usually survive. They survive with less earnings but they survive whereas government, it’s up to them to default. And, so I’m not entirely out of the stock market although I think that we may have a significant correction coming up in the next three months.
Chris Martenson: So with the possibility of significant correction let me widen out just a little bit further though into the larger macro view because I’m – you note that sovereign debt has a chance of defaulting where you could actually get wiped out, Greece being an example of that.
Marc Faber: Yeah correct.
Chris Martenson: Maybe Portugal coming up, next Spain, Italy, someone. I’m looking here at a chart of eight central bank balance sheets tracked from 2006 on and I note that they collectively sum up to around five and a half trillion dollars in 2006, and that by the end of 2011 they total fifteen and a half trillion dollars.
Marc Faber: Correct!
Chris Martenson: So that’s ten trillion dollars of balance sheet expansion in just those five years. So three questions. What would be the impact of all of that? Can those balance sheets ever be unwound without calamity ensuing and is this behavior going to continue? So starting with that first question what’s your assessment of the impact of this ten trillion dollars over five years?
Marc Faber: First of all, I do not believe that the central banks around the world will ever, and I repeat ever, reduce the balance sheets. They’ve come to pass of money printing and once you choose that path you’re in it and you have to print more money. So that will not happen. In other words, the reduction of the balance sheets of the central banks, the price level will be higher than it was before the balance sheet expansion. Now, what is inflation? Inflation can manifest itself in wages, in consumer prices, in asset prices such as real estate, equities, commodities, and so forth, art and collectibles. Now the problem is that all these asset prices don’t increase at the same rate at the same time. But, it’s a symptom of monetary inflation. And, I think that, say, if you look at commodities they brought some doubt in 1998 and were up substantially, they will not go back to the 1998 level. Will they go up either straight line, I don’t think so because we have China and the Chinese economy slowing down and so forth and so on. So I think that we have to be very careful what assets we have to choose. But in general I think that the purchasing power of money has diminished very significantly over the last ten, twenty, thirty years, and will continue to do so. So by being in cash and government bonds is not a protection against this depreciation in the value of money.
Chris Martenson: Oh absolutely! So you think – you answered all three of my questions at once, which is great. So to paraphrase here balance sheets are never going to contract, that once we’re on this path of printing we’re always on it…
Marc Faber: Actually, my view they will expand.
Chris Martenson: They will expand. So that’s the continued printing. So then let me paraphrase Irving Fisher. I think we’re on a permanent plateau of printing.
Marc Faber: I don’t think we are on a permanent plateau of printing but understand. If you start to print it has the biggest impact, then you print more, it has a lesser impact unless you increase the rate of money printing very significantly. And, the third money printing has even less impact and the problem is like the Fed, they printed money because they wanted to lift the housing market but the housing market is the only asset that didn’t go up substantially. We have bottomed out in many markets. I can see that but across the board real estate has not been effected positively from money printing. But what hasn’t been affected positively from money printing is the price of silver, is the price of gold, and of equities that have more than doubled from the lows in 2009.
Chris Martenson: Well, this is a very important point. If it turns out that once you are on the path of printing you stay on the path and then it requires ever-increasing rates of printing in order to have a similar impact on things. I mean with this ten trillion dollars of money printing it is by far the largest sustained effort of money printing we’ve ever seen and arguably the world economy is limping along. It’s in recession, multiple zones at this point in time. So it’s not working and this fits in with your thesis, which we’re just going to continue to see more and more and more printing. Obviously, this story has to end somehow. We can’t just continue to increasingly print at a faster rate with no impact without something happening.
Marc Faber: But Chris, what you say that it hasn’t been working. In my opinion it’s not entirely correct. In the short term, it has been working to some extent in the sense that equity prices are up and interest rates are down. And, so companies can issue bonds at extremely low rates. But every money printing exercise in the world leads to unintended consequences at a later point. And, this is the important issue to remember. We don’t know yet for sure what the unintended consequences are. For sure, we know one unintended consequence and this is that the middle class and the lower classes of society, say fifty percent of the U.S. has rather been hurt by the increase in the quantity of money in the sense that commodity prices in particular food and energy have gone up very substantially. And, since below fifty percent of income recipients in the U.S. spend a lot, a much larger portion of their income on food and energy than to say the ten percent richest people in America and highest income earners, they have been hurt by monetary policy. In addition, say the lower income groups if they have savings traditionally they keep them in saay deposits and in cash because they don’t have much money to invest in the first place. So the increase in the value of the S&P hasn’t helped them but it helped the five or ten percent or one percent of the population that owns equities. So it’s created a wider wealth inequality and wealth inequality and that is a negative from a society point of view.
Chris Martenson: Oh, I completely agree and there’s been, of course, savers have been punished with this zero percent interest rate environment in particular; pensions and other large long time horizon savers as it were are certainly also impacted…
Marc Faber: Yeah, plus the pension fund industry. They have to have some returns. When interest rates are at zero on cash deposits and on, say, long-term government funds on the ten year notes, say, two percent of thirty years, three percent, they cannot meet the liabilities so the unfunded liabilities increase rates substantially.
Chris Martenson: If you were in their shoes what would you do right now?
Marc Faber: In the shoes of whom?
Chris Martenson: Say a fiduciary of, say, a pension fund trustee or somebody like that…
Marc Faber: Well, I mean I think personally that over the last twenty years the financial sector has not criticized the federal reserve sufficiently. They should have attacked the federal reserve for printing money left, right, and center. But, the financial service industry benefits from writing asset prices. So when you have a crisis whether it’s the S&L crisis or the tequila crisis of ’94 or LPCM or the NASDAQ going down they cheered that the Fed continued to print money because it lifted asset prices. And, so their salaries went up and their performances went up and so forth and so on. So what I would do if I were the Fed chairman having been completely wrong about really everything, which is a truth series about the depression and the current conditions, for sure I would resign. But if I were, say, a pension fund I would tell the contributors and the recipients either you pay more or you receive less but we have to balance the books because the returns aren’t going to be the ones that we are used to between 1982 when the Dow Jones bottomed out below eight hundred and subsequently rose to over fourteen thousand. It’s not going to happen again in real terms. Maybe if they print money but if they print money, as I said, the purchasing power of the, say, average American household would diminish because the cost of living will increase that much more.
Chris Martenson: Oh absolutely and I want to just back up for one second and note that I should be more careful. You’re right, the money printing has had effects, of course, and my point back there was just that money printing today is not having the impact it had in the past. Ten trillion dumped into the markets and 1990 would have been a very different circumstance than what we’re seeing today. And, we’re seeing a lot of loss of traction today. I’m wondering, you know, from my vantage point I note that there’s never been a global recovery with oil prices even at an inflation adjusted level at the current levels their at. Do you see these high-energy prices particularly for petroleum? Are these a contributing factor in this loss of traction or is this just because the – is the loss of traction simply we have too much debt in the system and that’s the main factor here?
Marc Faber: I think you’re asking a very important question. Traditionally, oil prices around this level have been negative for economic growth around the world whereby we have to distinguish. Say, in 1998 when oil prices bottomed out at ten dollars a barrel the income from oil or the expenditures for oil were around four hundred million dollars. Sorry, four hundred billion dollars. Now, at the current price they are around four trillion dollars. In other words, some people get the four trillion dollars, the people that produce the oil, the Emirates, Saudi Arabia, Russian, Venezuela, Ecuador, Angola, Nigeria, and so forth. And, on the other hand, the people that use the oil, the U.S. and Western Europe, they pay a higher price. So for some people it’s revenue and for some people it’s an expenditure. The people that have to spend it unless they can borrow more and more as they have in the past, they can roll it over. In other words, it’s not damaging. But, the people that can’t borrow money to pay for the increased price in the oil, in other words, like an increased tax, they suffer so they have less to spend. And, that’s why I think the economy in the Western world will be relatively sluggish. I think we’ve bottomed out in the U.S. but will remain relatively sluggish. But, to mind you say anything happens in the Middle East and the price of oil goes from, say, the current level of a hundred ten or a hundred dollars to a hundred fifty or two hundred dollars, what do you think Uncle Ben will do? Uncle Ben, he knows only one thing and this is to print money.
Chris Martenson: Indeed!
Marc Faber: And, so he will print money and as a result of the money printing the oil price may, following a crisis, go down somewhat but it’s only going to go down to thirty dollars. It will stop at like, say, a hundred dollars and the economy will be sluggish and so he will need to print more money because what else does he know. He knows nothing.
Chris Martenson: Well, and as you noted before when he prints money he hands it out and it goes sort of disequally across society with the printing very much not ending up in the lower middle class hands at all. So those rising oil prices are just going to continue to exacerbate. We’ll have the wealth inequality issues, we’ll have rising levels of food stamp usage, and the bottom really gets taken to the cleaners in this printing effort. And, what I’m seeing is this really large structural problem where originally we had too much debt and now we might have too little oil because the oil markets are actually pretty tight right now. And, that’s a structural, maybe a geological problem, and so you can’t print oil but we’re going to do what we know how to do which is print. So these two great forces are coming together, a historical tendency to print which goes back, I believe to Roman times in their own way of printing. But, so we have this desire to print, that’s how we get through these things and then on the other hand we have these rising oil prices and that creates a structural imbalance. We’re going to have more and more money going into the system, which brings me to a very important question, which is that you’re a big proponent of holding precious metals, as am I. They’ve done quite well over the years. You’ve been advocating for them. They seem somewhat range bound in recent months. Where do you see precious metals fitting into this story now and say for the rest of the year?
Marc Faber: Well, I think that every person should own some precious metals as a reserve and as an insurance policy against a complete meltdown in the financial system. And, as you know, we had MF Global. What did the clients get, less than what they had in the company and I think eventually the financial system will be an MF Global where you don’t get your money back from the banks and the investment banks and from the mutual funds and so forth and so on. And, so I think everybody has to think to himself, how do I protect myself against such a black sworn event. Now you have a, say, a life insurance policy and you have a health insurance policy, if you have a health insurance policy and a life insurance policy, you’re not exactly hoping to die and have an accident. But if it happens you have it, and so I would suggest that people own some precious metals. And, I think, say, the price has gone up a lot since the lows in 1998, 1999, but compared to the expansion of credit in the world, compared to in the expansion of wealth in the world, and money printing, I don’t think that gold is terribly expensive. Having said that, I think we’ve reached a peak, but it went south of nine hundred twenty-one on September 6th of last year. We made the low at one thousand five hundred twenty-two on December 29th of 2011. We rallied again, I think we’re still in a correction period but I’m not going to sell my gold when I see people like Obama running America and possibly they’ll have a republican after 2013 but I don’t think the republicans will be much better. So I want to own some gold, and as I told you, I think the money printing will go on unless the Fed would come up and say we’re no longer going to print any money. The monetary base will remain steady, and even in that case I wouldn’t believe them.
Chris Martenson: Well, you mentioned something very important in there, which is MF Global, and I had a very instructive learning out of that. I actually got caught up in that. I had fifty dollars in an account. So I’m actually part of the class action. That’s a fun little fact there. I was keeping a placeholder account open at Lind Waldock. But at any rate, what I saw in the MF Global situation was that people who had fully allocated numbered bars in their accounts at COMEX had those taken as part of the trustee process sold out and put into a general pool and then they were distributed back, which is kind of like to me, it feels like you parked your car in a garage that went bankrupt and they seize your car, sold it, and gave you some money back for it. Just, to me that was a very instructive lesson that where you hold your gold seems to be incredibly important so when you advocate holding gold, I assume it’s not in a place like MF Global. How would you advocate people do that in the safest possible way given our learnings from MF Global?
Marc Faber: This is a very good question. Where is anything safe? I mean I think in a safe deposit box it’s relatively safe but maybe not in a safe deposit box in the U.S. because if you look at MF Global case it seems, and I don’t know for sure, but it seems that some people got their money but not others. This is a very disturbing thing to happen in the financial system. And, when I see this I think we have to be very prudent. So I would hold a safe deposit box outside the U.S. Now the question is how is it to hold a safe deposit in a bank if the bank closes down and this and that, you can also hold safe deposit boxes in duty free stores, warehouses, at airports around the world. In Switzerland we have them, in Singapore we have them, so that’s a possibility.
Chris Martenson: Okay and in part you mentioned that this would be insurance against the possibility of a systemic crisis. We had allegedly we came within hours of a really bad meltdown in 2008 Mervin King and Hank Paulson, then treasury secretary to be believed it was a pretty dire moment. I look at where we are today and I notice that derivatives happen to be a little over a hundred trillion dollars higher than they were in 2008 and the imbalances at the sovereign debt level seem to have grown much larger. So I’m seeing that the basic, let’s say, pressures on the system that we’re in play in 2008 all still seem to be in place, in fact, maybe larger in many cases. This systemic crisis you’re talking about, would this be something like we had in 2008 where it was literally the potential meltdown of the banking system itself or are you thinking of something that would result in capital controls being imposed so that certain regions could be firebox off from other regions. What are you talking about when you use the term systemic crisis?
Marc Faber: Well, I think that if you look at the history of crisis in the last, say, thirty years, each one was greater and larger. And, we had to mash that grain down so they printed money and so what did they produce, the housing bubble, and then even the worst crisis and the financial crisis. And, now they essentially give themselves the problems but they say alleviated the symptoms of the problems. And, I think the next crisis will be much worse. But, the question is, you know, as I said earlier, how do you protect yourself in the next crisis? Do you own equities, sovereign bonds, cash, commodities, gold, precious metals, and so forth. And, my view is that you’re probably better off in precious metals and in equities than in cash and in bonds. And I also happen to believe that in some parts of the U.S., notably the south, Phoenix, Atlanta, Las Vegas, where real estate prices are bottoming out. Now can they drop another ten percent? We are sure another drop of ten percent is not the end of the world when you consider that most individuals were in the NASDAQ in 2000 and then it dropped seventy percent. So I’m not saying that real estate will go up substantially, I’m just saying now you can buy real estate in the south of the U.S. at, say, thirty to forty percent discount to the construction costs. So I think it’s reasonably priced. I don’t think it’s – yeah, actually I think on global standards it’s relatively cheap. But, my wider view is, you know, since 1982 we had the colossal asset inflation in equities, in real estate, and since 1998 also in commodities. One day this asset inflation will come to an end. The way the consumer price inflation in the 70s came to an end in, say, 1980 and thereafter we had this inflation. So it may be that the asset price inflation will not vanish altogether but we may be in a period of disinflation so if people are investing money maybe they should adjust to the reality that the returns in the future will not be ten or twenty percent per annum but may only, say, two percent or three percent above the rate of inflation. And, in terms of bonds and cash it will be, say, five percent below the level of inflation.
Chris Martenson: Well, this is a fascinating point you made to start this out as well, which is a very important point here which that over the decades each crisis has been larger than the prior one. That is, that the crisis are growing in size. I’m wondering to widen our lens a whole lot, is that an indictment of an exponentially growing debt based money system? I mean that is, is it just a feature of the money system itself, or is this an indictment of human tendencies, how we tend to operate that system or both?
Marc Faber: Well, you could build a conspiracy theory. Basically the U.S. had a significant increase in the average household income in real terms from the late 1940s to essentially the mid-1960s. And, then inflation began to bite and real income growth slowed down. Then came the 1980s and in order not to disappoint the household income recipients you essentially printed money and had a huge debt expansion. So if you have an economic system and you suddenly grow your debt at a very high rate, it’s like an injection of a stimulant of steroids. So the economy grew at the relatively fast pace but built on additional debt. And, this obviously cannot go on forever. It went on for much longer than I thought because I started to write about excessive debt growth already in the late 80s, I was very early about this. But when it comes to an end you have a problem. So the Fed had never paid any attention, the Fed is about the worse economic forecast you can imagine. They are academics. They never go to a local pub. They never go shopping or they lie but basically they are a bunch of people who never worked a single day in their lives. They’re not businessmen. They have to balance the books, earn some money by selling goods, and pay the expenditure, they get paid by the government. And, so these people have no clue about the economy. And, so what happens is they never paid any attention to excessive credit growth and let me remind you, between 2000 and 2007, credit growth was five times the growth of the economy in nominal terms. In other words, in order to create one dollar of GDP, you had to borrow another five dollars from the credit market. Now this came to an end in 2008. Now the Fed have never paid any attention to credit growth, they realized if we have a credit addicted economy and credit growth slows down we have to print money. So that’s what they did. But believe me it doesn’t take a rocket scientist to see that if you print money you don’t create prosperity. Otherwise, every country would be unbelievably rich because every country would print money and be happy thereafter.
Chris Martenson: I think if it were possible to print your way to prosperity, we’d all be speaking Latin because the Romans would have figured it out. They were very clever people.
Marc Faber: Yeah, sure. I mean the Fed, in my view, in the dumbest institution because if they write history, they could figure out what money printing does but they do it.
Chris Martenson: Alright, so here we are in this path of printing and I want to speak of these local impacts down at the pub where you get a sense of things, a lot of talk on my site about the inflation the U.S. is exporting to the rest of the world, you live in Asia. What are you seeing from your vantage point there?
Marc Faber: Well, basically in Asia we have a lot of inflation and much more than what the government published. I mean prices are going up substantially and the economies are still doing reasonably well because we have a competitive advantage and we have to make the consumption growth. But, basically there’s a difference, I mean everywhere I go in the world there’s one thing that strikes me. You go to a luxury hotel, there’s Maserati’s, Ferraris, Bentleys, Jaguars, and so forth in front of the hotel and the ordinary people are struggling. I see that everywhere. And, so I think that in Asia we have also imbalanced growth and we have widening social divisions and rising social tensions and I also think that the Chinese economy, which grew a trend line between 2000 and 2007, and they printed money, had huge fiscal debt, and so forth and they are now in a significant slowdown period. I’m not talking about the stock market. Maybe the stock market goes up because of money printing. All I’m saying is the economy is slowing down very significantly which will have implications on the global economy.
Chris Martenson: So in summary we have the idea that we might want to side step equities for now, the next few months might be kind of interesting for equities, in part, because earnings…
Marc Faber: Well, I’m not sure. I think the market is overbought. I think correction is forthcoming but who knows if there is even money printing and markets are irrational at times and maybe they pushed them up more. The technical indicators have deteriorated. So I personally, when I was positive about equities in November, December but the sentiment was very negative now I’m taking some money off the table.
Chris Martenson: Some money off the table and the idea is to hold gold and silver as safely as you can maybe in a nice warehouse in an airport district or something.
Marc Faber: Yes, but all the gold and silver, I was just telling people, you should buy it as an insurance. It can go down thirty percent. We are in volatile markets so you know you want to have your insurance safely. You don’t want to leverage up in the futures market of gold and it goes down ten percent and you’re wiped out because of margin calls. It’s all a matter of degree, how much you allocate to each asset class.
Chris Martenson: Agreed and so gold and silver as the core insurance policy of the center of the portfolio. That’s the substance that will also never go to zero, at least to six thousand years of history suggests as much. So holding gold and silver…
Marc Faber: Yeah, but the problem is it can be taken away from you .
Chris Martenson: Are you concerned about that?
Marc Faber: Yes. You know looking at the governments and the interventions into the economic system, I mean I tell everybody I grew up in the 50s and 60s, I think we had much more freedom than there is freedom today. And, so this is a concern of mine. So I mean look, in my view we’re all doomed. But, maybe if you keep your gold in a safe place you’re doomed later than other people who have no gold and only paper money and government bonds.
Chris Martenson: Alright and I like that view so if we’re all doomed in this way though you’re really – this comes back to an indictment of the idea that are paper system itself, our paper money system is doomed, not – I mean we saw this in the 30s where even our gold money system had failed us at a period of time. There were productive factories and people wanted to work and there were plenty of raw materials, there were resources, what failed was the money system. So money systems can fail even if it’s the gold and silver money system, but now we have a fiat money system that’s been running amuck.
[Phone Connection Was Lost]
Hhhmmm – okay, well, I think we lost Marc there. I wanted to wish him well and congratulate him on just a wonderful interview. This has been a fabulous conversation that we’ve had. And, to summarize, he’s looking at equities as being overbought at the moment potentially but that equities are ultimately a way that you can be assured of side stepping some of the larger issues that are out there which are sovereign defaults. And, I’m obviously very bearish on sovereign debts at this point in time and correlated debts around that. He mentioned holding gold and silver as safely as you could but I think a very important point that he made that I want to reiterate here is that from his vantage point it’s ordinary people everywhere that are suffering and that there are social and political tensions that are following along with that. So there’s money printing which is obviously a worldwide phenomenon at this point is impacting people disequally. So those obviously closer to the trough are doing quite well and those further from the trough are doing less well and that this is something that central banks have a tendency to both miss and promulgate at the same time. He’s also noticing that there is a slowdown in the economy worldwide and so these are all important points to consider. So Marc if you happen to listen to this interview thank you very much. I truly appreciate your time.
Transcript for the podcast:
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