Below is the transcript to Bad Medicine: Dr. Marc Faber on Bernanke's Quack Cures:
Chris Martenson: Hello, and welcome to another PeakProsperity.com podcast. I’m your host Chris Martenson and today we welcome a very special guest: Dr. Marc Faber. Dr. Faber was born in Zurich, Switzerland and now lives in Thailand and has offices in Hong Kong.
Dr. Faber publishes a really, very widely read monthly investment newsletter, The Gloom, Boom and Doom Report, which highlights unusual investment opportunities and is the author of several books including Tommorrow’s Gold: Asia’s Age of Discovery published in 2002, right at the beginning of the age of discovery there. Just fantastic timing. And speaking of timing, in 1987 he warned his clients to cash out before Black Monday on Wall Street. He made them handsome profits by forecasting the burst of the Japanese Bubble in 1990, correctly predicted the collapse in U.S. gaming stocks in 1993 and he’s just been ahead of the curve every step of the way. His company Marc Faber Limited acts as an investment advisor concentrating on value investments with tremendous upside, often based on contrarian investment philosophies. He also invests and acts as a fund manger to private wealth clients, and was former Managing Director of Drexel, Burnham and Lambert. Welcome, Marc.
Dr. Marc Faber: Thank you.
Chris Martenson: One of the criticisms of an empire is that, almost by definition, it lacks the ability to see itself clearly. I see you as having the most essential characteristics required to shed light on the United States. You’re a deeply invested insider with an outsider’s perspective. But more than that you’ve demonstrated an incredible ability to think and perceive independently. To see where others are caught up on dangerously profitable groupthink. I want to begin at the center of the story, the United States, before moving out to the rest of the world. And in the very center of the U.S. lies the Federal Reserve itself: the Fed has been expanding its balance sheet by some $1.5 trillion since the crisis began and are now expanding it by a further $75 billion a month for the next six to seven months. So what are your views on these actions? Are they necessary, disruptive, ultimately more toxic than helpful - or something else?
Dr. Marc Faber: Well, basically, first of all thank you for having me on your show. But, secondly, I think that the government’s intervention into the free Market created the problems in the first place and we certainly have to view the Federal Reserve as having intervened into the free markets by keeping interest rates artificially low for far too long between 2000 and 2007. So their intervention at the present time is actually nothing new, it’s just larger in terms of scale and if you go back to the Federal Reserve starting with the early ‘80s, each intervention whether it was flooding the system with liquidity to save the S&L institutions or save Mexico in the Tequila crisis or LTCM in 1998 and so each intervention became larger and larger and created more misallocation of capital. And I think this will also be the case today.
Chris Martenson: So these interventions - we’ve just gotten further and further off the track. So you would say that today’s interventions, I mean are these just par for the course, it’s just a continuation of a trend that began in the ‘80s under Greenspan or do you see these …
Dr. Marc Faber: Yes, I think the Federal Reserve has openly admitted and written on several occasions that they can’t identify bubbles but these bubbles burst, they can intervene with extraordinary monetary measures to support asset markets, to prevent essentially a deflation or a recession from happening and that leads to very asymmetrical monetary policy. In other words, you let bubbles happen like the housing bubble, and you have to say – you have to wonder what the Federal Reserve was thinking about home prices going up so much and about credit between 2000 and 2007, expanding at five times the rate of nominal GDP. They also let the NASDAQ bubble happen. They couldn’t see that it was a bubble when NASDAQ stocks sold at 80 times earnings. They were taking about the huge productivity improvements and support and so on. So if there was one institution in the U.S. that consistently and repeatedly messed up every thing, the Federal Reserve is that institution.
Chris Martenson: So they do, they lie at the center of all of this in my mind as well.
Dr. Marc Faber: To a large extent, yes. I am not saying that everything is due to Federal Reserve’s policies because even under a gold standard you could have a bubble. Say in the 19th centaury when there were the gold discoveries in the mid-west and in California, you had boomtowns and when canals were built there were booms, same for railroads and so forth, but usually under a gold standard you have a bubble under one sector of the economy but you don’t have it across the board globally and that’s really what the Federal Reserve has done over the last couple of years.
Chris Martenson: Well so they’ve exported bubbles and let’s be fair: I think the ECB and other major central banks have gone along with the program.
Dr. Marc Faber: Correct. I mean, I’m not singling out the Federal Reserve as the only central bank that prints money. But certainly they are the leader let’s say. They are the most aggressive in terms of expansionary monetary policies compared to others we could say. In Indonesia if you trade money then the currency collapses, then import prices go up, and you have an automatic essential adjustment that hasn’t really taken place in the United States.
Chris Martenson: Right, right, so there’s one view then that says the Federal Reserve can’t see bubbles that’s the story they like to put out. But there’s another story that might go like this: which says the Federal Reserve is a serial bubble blower. They actually need bubbles, they know exactly what they’re doing, and now we could look at their purchase of assets as just an attempt to keep assets inflated.
Dr. Marc Faber: Yeah, I think to be fair the Federal Reserve, I have to say that this bubble blowing is not just the intention of the Federal Reserve but actually Wall Street was also encouraging bubbles because, remembering 2001, Mr. Krugman was arguing that the housing bubble would actually help the U.S. economy when in fact, thereafter the housing bubble destroyed the U.S. economy. And again in 2009 Mr. Krugman wrote that another bubble would be desirable at the present time and the consequences of which one could see at a later stage. So actually, the Federal Reserve is not the only one that is guilty of easing monetary policies. Everybody enjoyed it because everybody was minting money during the boom market in equities and in bonds.
Chris Martenson: Well, I want to ask you then because you’ve got the perspective on this that perhaps few have. My grandfather actually served on the New York Federal Reserve Board under Paul Volcker at one time. And way back when and I can guarantee you - if my grandfather were alive today he would not recognize the decisions that are being made or how the Fed is operating. He came from a very solid staid banking background and so I’m wondering if – am I just romanticizing? Was the Fed engaged in the same policies back then as they are now; or did something shift fundamentally over the past 10 or 20 years?
Dr. Marc Faber: Well, I think to be fair the Federal Reserve after its foundation in 1913 has essentially always pursued relatively expansionary monetary policies with one exception that stands out and that was the period Paul Volcker 1979-1980 when he pushed the discount rate to over 20%. A very courageous move I may add; but in general if you look at the price level in the U.S. in 1900 compared to 1800 and you look at real per capita increases between 1800 and 1900, then I have to say that the economic expansion under a gold standard essentially in the 19th century was stronger than in the 20th century when the Fed was in existence. And what happened is in the 20th century the price level as you well know and as everybody knows has gone up dramatically in terms of how much it costs you to fill the tank of your car. How much a movie ticket costs, how much a pound of bread costs, and so forth and so on. And so really the policies of the Federal Reserve have always been inflationary. And I would say every central bank that essentially has the control of over the quantity of money will in the long-run ensue inflationary policies. Maybe temporary, occasionally, they tighten the monetary policies, but actually in the U.S. we didn’t have tight monetary policies now for 10-20 years.
Chris Martenson: The Fed I think is not quite as firm on this as the Bank of England. Bank of England has a stated target: 2% inflation, so they’ve put it right out on the table. They’ve said, we’re going to for it, we want inflation this much, not more, not less and I think that the Fed is …
Dr. Marc Faber: Yeah, but do you understand it’s very difficult to define inflation. The Federal Reserve essentially targets core inflation. Core inflation has nothing to do with your cost of living increases. And as you know the basket of goods and services that are used to measure inflation can be weighted in such a way that things that go up a lot like health care costs, insurance premiums, energy, in this regard entirely and other items where prices are deflating like a T-shirt are over-weighted.
Chris Martenson: … yeah, that really …
Dr. Marc Faber: I have a large readership for my newsletter and website and I ask to please send me an email if anyone has the impression that their costs of living increases were less than 5% per annum So far I haven’t received a single email.
Chris Martenson: I don’t think you’d get any emails from anybody who’s listening to this either. And inflation varies, it depends on your circumstances, so if you have a child about to enter or in college …
Dr. Marc Faber: Absolutely, absolutely, every household has a different inflation rate. All I can say is maybe I buy at the wrong places and I travel in the wrong airplanes and stay at the wrong hotels but my costs of living are going up every year.
Chris Martenson: … yeah, they absolutely are and we should also note that the official measure of inflation does not include taxes. The entire cost of government …
Dr. Marc Faber: Yeah, absolutely, and in that – hidden taxes, namely fees that you pay to the government and in any event I don’t believe that any one of your listeners who will have a wife tell them: listen, you can give me less household money because prices are down. That I don’t believe.
Chris Martenson: … we’ll try that sometime. I think you’re right. So we have – the theme then is that we actually have a lot of inflation. I mean if you look at a basket – let’s take the entire continuous commodity index and start in 2002 until today: it’s been going up over double digits on a per annum basis.
Dr. Marc Faber: Yes, of course, and also a symptom of inflation is when the currency weakens and a symptom of inflation is the explosion in international reserves, which have grown from a trillion dollars in 1997 to now over $9 trillion. These are all symptoms of inflation and we have to define inflation as an increase in credit and in the quantity of money. And everything else are symptoms as inflation can manifest itself in a global economy in Vietnam where prices are going up let’s say 12% to 15% annual rate. In India and China where prices are going up by at least 10% per annum. So when you print in the U.S. it doesn’t necessarily have to inflate the housing market. That shows the futility of U.S. monetary policies. U.S. monetary policies were designed by the ranking basically to lift home prices but this hasn’t gone up. Other things have been inflating, namely, like oil and food prices, which then hurt the consumer when the policies are actually designed to help the consumer.
Chris Martenson: Well is there …
Dr. Marc Faber: I mean Mr. Bernanke often said - and I hate to essentially be outspoken in this way because I think he’s quite a decent fellow - but he’s just ignorant of economics and he’s a victim of his ill-conceived monetary theories.
Chris Martenson: … so he’s running a big experiment and how do you see this experiment playing out? So from my perspective I have – the inflation deflation debate it rages and I’ve written recently that we should, I’m italicizing that word as I speak it, we should be in deflation but we’re not.
Dr. Marc Faber: We should have been in deflation after 1980 because the Kondratieff peaked out in 1980 or in the mid-seventies to the eighties and then we have a downward wave in commodity prices and declining interest rates. That is the time we should have had deflation. But now that commodity prices are turning up it’s more likely that we are in a very high inflationary environment and the reason I have this debate with the deflation is not so much that they believe in deflation and that I believe in inflation - but their conclusion to buy U.S. government bonds in a deflationary environment is, of course, a disastrous recommendation because if you really have the credit collapse, the deflationists are arguing about, then obviously tax revenues will collapse and the fiscal deficit will go to the moon.
I mean, Tim Geithner just signed the treasury report about the budget deficit about the financing of the U.S. for 2010. The deficit was not $1.4 trillion but $2 trillion signed by him. And so the government debt goes up and up and up and up and then the interest payments from the government go – do go up and the quality of government debt goes down and so eventually you have a junk bond in the U.S.. I believe the U.S. government bonds are junk already today but as long as you have rating agencies that are dreaming and publishing reports that are completely useless, people still buy the government bonds in the U.S.
Chris Martenson: Well, let me play a slight devil’s advocate on this. So right now the Federal Reserve is buying about 100% of all the new Treasury issuances for maybe the next six or seven months.
Dr. Marc Faber: Yes.
Chris Martenson: Can’t they just keep doing that forever? I mean what would …
Dr. Marc Faber: They can keep doing that forever and obviously then the currency depreciates over time and interest rates go up over time. But they can do it for a very long-time. And at some stage you go into a hyperinflation environment. I’m not saying that hyperinflation is around the corner but with this policy you’re moving a step closer to a danger zone.
Chris Martenson: So they’re increasing the risk, we can’t be certain but obviously the risk is now higher than it was two years ago?
Dr. Marc Faber: Much higher. I would also say that the financial position of the U.S. today - if you look at the unfunded liabilities, if you look at the external liabilities, and so forth and so on, it’s of course much, much worse than 10, 15, or 20 years ago.
Chris Martenson: Well, they actually – I think if we did an accrual basis which we’ve been adding $3, $4 trillion a year to the overall overall negative position on that…
Dr. Marc Faber: Absolutely, absolutely. The government’s debt including Fannie Mae and Freddie Mac, by the way another intervention by the government into the free market that had disastrous consequences. I mean basically everything the government has touched in the U. S. has been a complete failure. From the post office to monetary policies to fiscal policies. You want to have a consistent track record of complete failures? Look at the U.S. government.
Chris Martenson: … Now tell us how you really feel [laughing]
Dr. Marc Faber: I beg your pardon?
Chris Martenson: … I said tell us how you really feel about that one.
Dr. Marc Faber: Well, I think it’s a wonderful experience because it shows that the private sector tends to do things better. They don’t do it perfectly well but at least in the private sector when something goes wrong then an institution or a corporation goes bankrupt then the system is cleaned. The worst part of government intervention is that they don’t let their own failures appear and instead of letting big companies go bust and clean the system, they go and support them and this is unfair to the strong competitors because capitalism is all about the survival of the fittest and about people who make or take wrong decisions being punished through losses.
Chris Martenson: I agree with all of that and I think it’s corrosive to the markets because participants like myself start to look at it and say this is not free, it’s not fair – how is it possible that the bond holders of Citi didn’t take a single penny of losses. This just doesn’t feel right and worse – investing is about taking your best shot, doing due diligence, figuring out the fundamentals. But we’re all speculators if we have to sort of guess what the government’s going to do next, who they’re going to bail out, how much money the Fed’s going to throw in, because those are unknowable. You can do all the due diligence you want but you can’t predict any of that.
Dr. Marc Faber: Right. In particular it’s unfair because there is a revolving door between some financial institutions and the government. So your access to information is, of course, much, much worse than the access of information of the big financial institutions. And so you have a marketplace that is completely unfair.
Chris Martenson: Right. So let me get to the punchline. So the way that I’ve been analyzing this myself, it sounds like you might agree, is the unfunded liabilities plus the current fiscal structure, the deficit structure, how much mandatory spending is already baked in the cake compared to total economic output which is what tax revenues come in from. There’s this enormous mismatch between revenues and expenditures.
Dr. Marc Faber: Right.
Chris Martenson: How does this resolve itself?
Part 2: Prognosis for 2011 (for enrolled PeakProsperity.com members - click here to enroll), Marc details his thinking on how the engame will play out, as well as his specific outlook for 2011.
Dr Faber publishes a widely read monthly investment newsletter "The Gloom Boom & Doom Report" 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 for several weeks on Amazon's best seller list 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.