Podcast

Marc Faber: The Perils of Money Printing's Unintended Consequences

Friday, March 16, 2012, 11:05 PM

Marc Faber does not mince words. He believes that the money printing policies of the Federal Reserve and its sister central banks around the globe have put the world's currencies on an inexorable, accelerating, inflationary down slope.

The dangers of money printing are many, in his eyes. But in particular, he worries about the unintended consequences it subjects the populace to. Beyond currency devaluation, it creates malinvestment that leads to asset bubbles that wreak havoc when they burst. And even more nefarious, money printing disproportionately punishes the lower classes, resulting in volatile social and political tensions.

It's no surprise, then, that he's feeling particularly defensive these days. While he generally advises those looking to protect their purchasing power to invest capital in precious metals and the equity markets (the rationale being that inflation should hurt equity prices less than bond prices), he warns that equities appear overbought at this time.

On Inflation

First of all, I do not believe that the central banks around the world will ever, and I repeat ever, reduce their balance sheets. They’ve gone the path of money printing, and once you choose that path you’re in it and you have to print more money.

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.

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 being in cash and government bonds is not a protection against this depreciation in the value of money.

On His Love for Central Bankers

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 a relatively fast pace, but built on additional debt. And this obviously cannot go on forever, and when it comes to an end, you have a problem. But the Fed had never paid any attention.

The Fed is about the worst economic forecaster 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 that have to balance the books, earn some money by selling goods, and pay the expenditures. 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 never having 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.

On the Unintended Consequences of Money Printing

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.

We know one unintended consequence, and this is that the middle class and the lower classes of society, say 50% 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 50% of income recipients in the U.S. spend a lot, a much larger portion of their income on food and energy than, say, the 10% richest people in America and highest income earners, they have been hurt by monetary policy. In addition, the lower income groups, if they have savings, traditionally they keep them in safe 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 5% or 10% or 1% of the population that owns equities. So it's created a wider wealth inequality, and that is a negative from a society point of view.

Click the play button below to listen to Chris' interview with Marc Faber (runtime 40m:45s):

iTunes: Play/Download/Subscribe to the Podcast

Download/Play the Podcast (mp3)
Report a Problem Playing the Podcast

Or click here to read the full transcript.  


Dr. Faber publishes a widely read monthly investment newsletter, The Gloom Boom & Doom Report, which highlights unusual investment opportunities, and is the author of several books including Tomorrow's Gold Asia's Age of Discovery, which was first published in 2002 and highlights future investment opportunities around the world.  Tomorrow's Gold was on Amazon's best seller list for several weeks and is being translated into Japanese, Chinese, Korean, Thai, and German. Dr. Faber is also a regular contributor to several leading financial publications around the world.

Between 1970 and 1978, Dr. Faber worked for White Weld & Company Limited in New York, Zurich, and Hong Kong. Since 1973, he has lived in Hong Kong. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, MARC FABER LIMITED, which acts as an investment advisor and fund manager.


Our series of podcast interviews with notable minds includes:

Related content

65 Comments

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 507
Next questions

RodgerMitchell wrote:

<i>So again... how did Zimbabwe go wrong Rodger? </i>

Robert Mugabe stole farm land from people who knew how to farm, and gave it to people who didn't.

Next question.

Rodger Malcolm Mitchell

Rodger,

I'm rather disappointed in your responses. There is an expectation on this site that extraordinary assertions need extraordinary support. I agree that Mugabe stole farm land, but was that his only crime against his people? Am I to assume that had he not stolen farm land, that everything would be okay? Do you really believe that to be the case? What about all the other examples that Davos cited?

RodgerMitchell wrote:

Everyone knows federal deficit spending causes inflation, and we're right at the tipping point.

O.K., so there has been zero relationship between federal deficit and inflation since the Unites States became Monetarily Sovereign in 1971 -- 41 years!. See: rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/

And gosh, there has been zero relationship between federal deficits and inflation since 1952 -- 60 years! See: research.stlouisfed.org/fredgraph.png 

But surely, with the massive deficits we've had, and the big ones projected, those deficits will cause inflation in the near future. Everyone knows that.  Oops: See: www.clevelandfed.org/research/data/inflation_expectations/index.cfm

Well, what will you believe, 60 years of data plus projections based on data -- or intuition?

Yes, what?  

Rodger Malcolm Mitchell

I read through some of your articles, trying to understand your point. I saw "monetary" and "sovereign" many times, but no real explanation of what exactly your theory entails. Would you be so kind as to post a link to a site that explains your theory? The Wikipedia site wasn't too helpful http://en.wikipedia.org/wiki/Monetary_sovereignty. I'm interested in how it works and particularly where it has worked in history. It would also be interesting to see where the regimes that Davos cited went wrong.

As flawed as the Fed's CPI calculation is, at least they have data presented in many forms to see how the index has progressed over time. Your link shows year on year changes for federal government debt versus CPI. Since there isn't a correlation between these 2 graphed series, you assume that there isn't any correlation between government debt and inflation. Let's look at a longer time scale to see if any correlation becomes evident.

This link just shows the cumulative effects of the inflation index over time: http://research.stlouisfed.org/fred2/series/CPIAUCSL. Note the change in slope that occurred a few years before Nixon closed the gold window in 1971. This link shows the cumulative federal government debt: http://research.stlouisfed.org/fred2/series/GFDEBTN. Sorry that I couldn't find a link at the fed site that contained both these graphs together. It would also be nice to see it on a semi-log scale so that small perturbations at the beginning of the rise become evident.

From my understanding of your theory, the amount of debt that the government carries is of no concern. How will the debt get repaid (without rolling it over to more debt)? How do you avoid the "Zimbabwe Syndrome"? Which demographic groups benefit most and which get the least benefit from this arrangement? (I'm generally looking at how fair this system is for the poor, middle, and rich classes for each of the generations it impacts from inception until its ultimate demise in the future.)

RodgerMitchell wrote:

Yes, Zimbabwe is a great authority for you. I suggest you listen to everything Robert Mugabe's bank tells you.  And also believe him if he tells you he didn't steal farm land from farmers and give it to people who had no clue about farming, and that didn't cause the collapse of his agrarian economy. He's a great source of information. 

It's been fun. Not informative, but fun.  See you in a few years. Meanwhile, if you want to learn economics, try: moslereconomics.com/2012/03/16/inflation-expectations/

Rodger Malcolm Mitchell

 

You've generated quite a bit of heat, but not too much illumination with your posts. To be fair, some of the posts directed at you were less than respectful. Nonetheless, I'd like to continue the conversation on this thread. If your theory has merit, I'd like to know more about it. Right now, I'm not convinced that it is more than a grand deception.

I hope you will treat me with as much respect as I give you.

Grover

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Baked

1. Federal debt must be paid back by taxpayers. (But, because the federal government has the unlimited power to create the money to pay its bills, there is no need to ask taxpayers to do it.)

2. Federal debt adds to the government’s interest paying burden. (Again, interest is no burden to a entity having the unlimited ability to create money.

3. Federal debt uses up lending funds that otherwise would go to private needs. (But, federal spending adds money to the economy, making more, not less, funds available for private lending.)

 4. By increasing the money supply, federal deficits reduce the value of money, thereby causing inflation. Readers of this blog have seen the graph (below) which shows no relationship between federal deficits — even large federal deficits — and inflation. Note how the peaks and valleys of deficit growth do not match the peaks and valleys of inflation growth:

Rodger: I went to your website.  I'd ask my late dog Copper for economic advice before believing any of the above drivel.  You should watch CM's Chapter 16.  CPI, where they back out food and gas from inflation.  You sound as moronic as Ben Bernanke saying "we don't have inflation."

Good luck buddy, you are going to need it.

Oh, and one more thing: Every country that tried this wound up in hyperinfaltion. (Again, interest is no burden to a entity having the unlimited ability to create money.

real cost of living

And FTW:  According to the government, who back out oil and food from "inflation" the dollar has lost 82% of its value since Nixon slammed the gold window.

So there you go genius.  They create more money and YOU pay more.  Why?  Because your dollar is worth less than 2 dimes.  And I'm not talking about what you may or maynot have smoked when you wrote that trash.  And God, I hope you do get high and were high, because if not, I'm going to have to use the m-word.  

This blows all that drivel you wrote ---- including your book --- out the door.  You should name your blog Monopoly Money & Why It's Valuable.  I hope you golf better then you "econ."

Some people fail to understand that the law of supply and demand applies directly to the value of our money.

When wages inflate it is harder to notice this.  Now, with globalization and wages that have been flat since the 1970s as we compete against workers makeing 2 bucks a day one would have to be an utter moron not to grasp that this is a serious problem.

[Moderator's note:  This post is a violation of the forum guidelines. Personal attacks and name calling are not allowed.  Appropriate corrective action with the user has been undertaken.]

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 1463
Rodger and MS.

The tipping point has no correlation to deficit spending..  it arrives when the debt servicing costs finally become such a drag, due to absolute size,  interest rate, or both, that they disable growth.  The truth is, we have always grown out of our problems in the recent past.  As you know, our present debt-based monetary system needs constant, exponential growth in order to be healthy.  Most of us here believe that this growth will be forced on us in the future.. but that it will be nominal (read inflationary) growth.. not the organic kind (which is now impeded by the debt servicing costs, runaway socialism, and peak cheap energy, among other things).  As well, the tipping point can be historically correlated to debt:GDP as per our friends Reinhard and Rogoff;

http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691152...

As I said before, I think this conversation is interesting in the context of possible future monetary systems... I would in fact like to see the FED ended, and the monetary creation mechanism back in truly "sovereign" hands.  The mechanisms that enforce scarcity integrity, be it ties to PM's, energy, or a basket, will be of utmost importance.  Other than this context, your ideas are, in my opinion, nothing but magical thinking.   

SingleSpeak's picture
SingleSpeak
Status: Gold Member (Offline)
Joined: Dec 1 2008
Posts: 427
Darn it ....

I've been trying to rationalize a way to collect Social Security and Medicare in the not too distant future, in the unlikely event that it still exists. Since being robbed by someone (government) doesn't justify stealing from someone else, I need some help here. 

SS

Moderator Jason's picture
Moderator Jason
Status: Moderator (Offline)
Joined: Dec 23 2008
Posts: 97
Recent comments in this thread

We were very impressed to read the polite and informative posts of several users on this thread.  They endeavored to present facts and data in the context of a civil conversation with a new user who had a differing viewpoint.  Here at CM.com we have intense pride at the fact that we are a cut above the crowd.  This type of civil, educational debate is the most productive way to increase knowledge and be persuasive to others who hold different opinions.

On the other hand, we were disappointed to read some of the other comments on this thread - written by more than one user - which used prying personal attacks, insults, degrading commentary, and crude characterization against a person whose only crime was holding a contrary opinion.  Not only is this a completely ineffective means of persuading others, but fundamentally this is not what we are about.

giulist's picture
giulist
Status: Member (Offline)
Joined: Feb 16 2012
Posts: 4
I agree Jason ....

...almost as disappointing as the fact that no one from CM has come on here to address Rodger's points.

I don't post bc I'm here to learn, but I keep coming back to this thread and am disappointed to see no substantive replies to his point-by-point attacks.

Doug's picture
Doug
Status: Diamond Member (Offline)
Joined: Oct 1 2008
Posts: 2736
giulist wrote: ...almost as

giulist wrote:

...almost as disappointing as the fact that no one from CM has come on here to address Rodger's points.

I don't post bc I'm here to learn, but I keep coming back to this thread and am disappointed to see no substantive replies to his point-by-point attacks.

Hmmm, actually I thought that Jim H and Grover made some very good points.  If you go to Rodger's blog there are a number of articles, and he linked some here, that explain his pov.   www.nofica.com

The most of value I've been able to glean from the posts on his site is that fiat money is essential to his view of monetary policy.  That's what he means by "economic sovereignty".  As to why he thinks that's the ideal system, and why he isn't tickled pink now, since that is our monetary policy, I haven't quite figured out.  If I do, I'll let you know.

Doug

giulist's picture
giulist
Status: Member (Offline)
Joined: Feb 16 2012
Posts: 4
Thanks Doug

I have read the guy's summary of monetary sovereignty - it seems silly that he suggests that people don't understand such a simple concept: We can "create" money to pay off debts without anyone else's permission, the Euros can't - therefore they can default and we can't(or shouldn't have to, in his mind).   His entire thesis seems to be based on some graphs that he claims show no correlation between deficit spending and inflation.  How these figures came about or their validity is not something I would know.

Instead of seeing other graphs to show inflation through the years and instigate some sort of "graph-off", I'd like to understand why his data may or may not be correct and/or why some other data would be more reflective of our financial history.

So, if the U.S. were to simply press a few computer keys and credit all of it's debtors with their balances, that would cause mass inflation in the U.S.?  Why, because they now have so much USD on hand that they would buy up American goods and/or investments, forcing a rise in prices?

I apologize if this seems amateur - I just really want to understand both sides.

Thanks

marcmayor's picture
marcmayor
Status: Member (Offline)
Joined: Dec 2 2011
Posts: 1
Allocated & numbered bars at Comex part of the MF liquidation

Chris, 

The claim that allocated & numbered bars at Comex were part of the MF liquidation, is this something you were told privately by a client or has it been in media stories?

If it's been in the media, could you please post one or several links?

Thanks in advance

Marc

nickbert's picture
nickbert
Status: Diamond Member (Offline)
Joined: Jan 14 2009
Posts: 1115
Getting back to the subject

Getting back to the subject of the interview, my ears picked up on the bit where Marc says he has been seeing the growing wealth inequality everywhere.  I wish it were otherwise, but so far I have to agree with him when it comes to what I've seen in Mongolia.  Generally speaking, most people are a little more prosperous than they were 10 or 20 years ago, but there are some that have become incredibly wealthy compared to the norm, and the norm is still pretty poor.  It's hard to pin down any one cause.  Governmental corruption, lack of opportunities outside of the city, a society adjusting to a relatively new free market system, and sometimes simply exceptional cleverness & ability on the part of some entrepreneurs and businessmen..... I think all play a part to varying degrees.  And unfortunately, many of the wealthy think flaunting their wealth in an extravagant manner is a good thing.  One of several cultural differences I'm trying to adjust to.  I have no problem with people succeeding on their own merits, but the examples of people getting rich through corruption and growing levels of wealth inequality (and flaunting it) are definitely unhealthy from a societal point of view. 

I don't have much personal experience about China, but one of my wife's extended family who works in Beijing says the gap between rich and poor is worse (or at least more visible) there than in Mongolia.  Also, the driver who took us to and from the airport in Beijing during our recent layover there queried us both times on prices of luxury cars in America.  Apparently, there is a huge demand for luxury cars in Beijing even despite import taxes that he says amount to roughly the full value of the cars themselves.  I can't imagine myself paying full price for a brand new BMW or Lexus in America, but the idea of paying twice that much seems truly crazy.  But the status symbol is just that important apparently. 

- Nick

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Roger....

I've been told by the moderator (I hate getting scolded) that my approach in #16 thread was rude, and that I should foster a more delicate response. So, if offended then my apology.

Please understand however that I have seen many posters on many sites over the years who's testosterone levels move them to another site where they post to get all the bumble Bea's riled up a bit. It is my determination that this was your intention when I read your thread, and so I responded as I did (I expected the responses that followed, and was unfortunately subjected to them too). Obviously your intentions have worked as planned because you have received some responses that have been over the top (again, byproduct of your intentions). I frankly am not a fan of yours after researching your material. Nothing personal but economists by trade bore me. It isn't you per se just the group as a whole. You know the crowd, they are hungry, and expect a sandwich to appear, for a price of course.

BOB

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Doug...

I totally agree that Jim H. and Grover took the time to patiently respond to Mr. Mitchell. I just went short in my posting (#16) because I spent a quick research on Mr. Mitchell, and didn't like the read or his communication skills. Plus I'm on meds after surgery and am apt to be sloppy with my commentary.

Davos, you haven't a clue about me my brother, and if hitting a white ball around the course makes me something out of a frankenstein movie then I suggest anger management classes for you. I suspect that you worry about things that you couldn't possibly understand unless you had intimate knowledge. For the record, we have never met, have spent zero time together. Many millions of low lifes such as myself do golf you know. On the cheap too. What amazes me now as I look back is you didn't scream and yell at Erik T. because he spent $57 bucks on a pot pie, and $31 bucks on a salad (you're his hero you know), plus had to leave a 20% tip, another $16 bucks and change. I could have played 4 rounds w/beer for that kind of coin. Just priorities my man, that's all. Some like to eat and some like to golf... Go Tigers

Bob

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2485
robert essian

robert essian wrote:

Davos....

Like a steam locomotive, rollin' down the track,

He's gone, he's gone

And nothin's gonna bring him back.

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Really....?

Dogs_In_A_Pile wrote:

robert essian wrote:

Davos....

Like a steam locomotive, rollin' down the track,

He's gone, he's gone

And nothin's gonna bring him back.

Is this sarcasm Dogs......  or has he really left us again?

Shame if he has, I was just enjoying outing morons again...

Mike

Gado's picture
Gado
Status: Member (Offline)
Joined: Aug 31 2008
Posts: 24
robert essian wrote:On the

robert essian wrote:
On the cheap too. What amazes me now as I look back is you didn't scream and yell at Erik T. because he spent $57 bucks on a pot pie, and $31 bucks on a salad (you're his hero you know), plus had to leave a 20% tip, 

Bob

A 20% tip in Australia What a Galah.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments