The original Dr. Doom speaks

Marc Faber pronounces his verdict:

Central banks will never tighten monetary policy again, merely print, print, print.

Bubbles used to be concentrated in one sector or region in the 19th century, but off of the gold standard this concentration has ended.

“The lifetime achievement of Greenspan and Bernanke is really that they created a bubble in everything…everywhere.”

“Central banks love to see asset prices go up,” and their policy reflects their desperation to perpetuate this.

US housing bubble that Greenspan could not spot (even though he has recently spotted bubbles in Asia) stands in stark contrast to that of Hong Kong in 1997, where prices fell by 70%, yet none of the major developers went bankrupt; this was a result of a system not built on excessive debt like that of the US.

“You have to ask what they were smoking at the Federal Reserve,” during the housing bubble, as prices were increasing by 18% annually when interest rates started to steadily rise in 2004.

Over the last couple of years, when the gross increase in public debt has exceeded the gross decrease in private debt, markets have risen, whereas when private debt growth has outpaced public debt growth, markets have tanked.

However, last year Economist Gregory Mankiw articulated the position which according to Faber essentially echoes that of Fed #2 Janet Yellen and pervades much of the Fed generally, that “The problem is that people are saving money instead of spending, and we have to get the bastards spending to keep the economy going,” so the key is to inflate the money supply at something like 6% per annum. Thus, Faber says “As far as I’m concerned, the Federal Reserve will keep interest rates at 0, precisely 0…in real terms”.

I understand and respect his case, but for reasons I have delineated in RGD, I do not think the hyperinflation scenario will proceed as Faber assumes. That being said, I agree that the central banks will leave their interest rates at zero; the more important question is if that will ultimately have any relevance to anything during an ongoing debt-deflation process. Notice that contra both Keynes and Friedman, very liberal monetary policies are not instigating growth of the money supply.

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.