Marc Faber: “U.S. dollar weakness is a symptom of inflation in the system”

Below are two videos from Marc Faber’s recent interview on Asia Confidential.  In it, he takes questions from user emailsregarding the U.S. dollar, economic decline in the U.S. and gold as an investment.

He sees a need for the U.S. to borrow increasing amounts of money going forward – not less. As a result, what was a crisis in finance in 2008, resulting in the nationalization of Fannie Mae and Freddie Mac will become a national bankruptcy. The U.S. will borrow and print money. The dollar will fall precipitously. Then, “next station is when the U.S. government goes bust.”

Edward here. This might make for good headlines on Bloomberg, but it is patently false.  The United States is not now or ever going bust. A sovereign government which borrows in its own currency in a fiat currency system can never go bust. An entity which borrows and prints its own money does not have the same constraints that, say, California or Ireland have. How prices are affected is another issue altogether.

That’s where gold comes into the picture. Here, there are many questions.

  • Is it overvalued?
  • Is it a good inflation hedge?
  • How does gold perform in deflationary environments?
  • How does it perform against equities over the longer run?
  • What about silver?

Faber takes on all of these.

On the whole, he is an inflationista and does not believe the U.S. will suffer deflation. When asked how gold might perform in a significant deflationary environment, he responds “first of all, I would like to make a very clear statement. I will believe in deflation once we have a significant period of U.S. dollar strength. U.S. dollar weakness is a symptom of inflation in the system.”

He goes on to say that gold outperforms other asset classes in a deflationary environment and is therefore a good hedge against fiat currency revulsion whether one expects deflation or inflation.

My own view is similar. However, I would differentiate between consumer price inflation, which will remain non-existent while industrial capacity and employment levels are at depressionary levels.  The inflation in the system will manifest itself first in asset prices – with industrial and food commodities or oil being the transmission mechanism into consumer prices.  Secular consumer price inflation will not return until the slack in the system is purged. 

I would add that this is one principal reason that the Great Moderation occurred despite enormous money printing in Japan and extraordinarily loose monetary policy in the U.S.  After China, India and Eastern Europe joined the capitalist system, the enormous increase in labor – both skilled and unskilled – acted as a check on inflation of the consumer price variety.

Alan Greenspan was fooled by this and kept monetary policy too loose. The result was asset bubbles again and again.  Going forward, it would comforting to see central banks target asset prices not just to gain policy traction through reflation but in order to cool the economy through deflation.

 

14 Comments
  1. aitrader says

    Faber seems to see things through a Freeman monetarist perspective and sees the large amount of dollars in bank coffers as inherently inflationary. And he would be right if we were in a growing economy.

    But as von Mises pointed out, a deflationary spiral caused by collapsing credit (i.e. debt) as we are in now sops up and dwarfs any attempts at money printing. If one looks at the bank reserves they are at astronomical levels en masse and little of the governmental attempts to inflate are having any affect.

    A weaker dollar is also in the U.S. interest as it reduces real (vs. nominal) foreign debt and reduces trade imbalances favoring exports over imports. The U.S. may pay lip service to a stronger dollar in order to keep foreign creditors calmer, but I believe it is in fact pushing a weak dollar policy as a partial solution to jump starting economic growth.

    Faber may be right about inflation down the road if the economy begins to expand again. Right now he is way, way ahead of himself IMO.

  2. Jo says

    ‘ A sovereign government which borrows in its own currency in a fiat currency system can never go bust. ‘

    Ah, the good ol’ playbook!

    1. aitrader says

      In the absence of external trade and external currencies (fiat or otherwise), I would agree. No man is an island and no country its own planet. Printing fiat currency to satify debt against a floating currency exchange and external trade is a recipe for disaster. The U.S. has been “its own planet” to some extent due to everything being priced in dollars. As this diminishes so will the US’ ability to alleviate its debt via money printing. As the dollar’s role falls Dick Cheney’s, “deficits don’t matter” utterance will become as ridiculous a quote as Bill Gates, “no PC needs more than 640K RAM” IMO.

  3. Vangel says

    However, I would differentiate between consumer price inflation, which will remain non-existent while industrial capacity and employment levels are at depressionary levels.

    You might want to rethink this. Yugoslavia had industrial capacity and employment levels are at depression levels but still managed to have an inflation rate of four quintillion percent. I know because the C$200 or so that I sent to my uncle out of my summer job were enough to have him pay off the loan he took to add a second story on his home. Had he waited a few days he would have had most of that C$200 in his pocket and still been able to pay off the loan.

    And if you research Weimar Germany, Zimbabwe or the South American experience you would find that inflation tends to go hand in hand with economic weakness because that is when governments become desperate and intervene in the economy by printing money and monetizing debts.

    The inflation in the system will manifest itself first in asset prices – with industrial and food commodities or oil being the transmission mechanism into consumer prices. Secular consumer price inflation will not return until the slack in the system is purged.

    Try looking at your healthcare, education, food, energy or insurance costs and you find inflation. Look at the cost to mail a letter or buy a cup of coffee at Tim Horton’s. Look at detergent, tooth paste, toilet paper, shampoo, soap, dental floss, razors, etc. You find that items of the same quality cost more, not less and that the price reductions come from the substitution of inferior products and packaging changes that disguise per unit costs.

    1. Vangel says

      Sorry about the grammatical error. I have a tendency to type very quickly and change things on the fly without catching all of the other changes that are necessary to use the language correctly.

  4. Rahul Deodhar says

    The matter is immensely complex. And I keep getting lost here.

    First, if people continue to buy / fund US debt by purchase of treasuries then there is a good chance that this extra money will not reach the consumers (no employment growth). This will flow to banks and money channels. This will lead to high US asset prices (not sure if they can go higher) through higher valuations.

    The cost of government debt will manifest through higher cost of public goods. But I am not sure if this administration will let cost go up. It means more borrowing. => more headache

    After inflating US asset prices to certain extent further funds may flow out of US into other markets. Globally, we could see more bubbles initiated in first half of next year. Part of this money will also go in financing other sovereign government bonds. It means US government borrowing may end up financing global debt.

    But if commodities and particularly oil hits the consumption basket with higher prices then we have inflation. This will reduce sales of discretionary => further pain.

    If world currencies hold up their relationship with dollar then it is possible price rise may be contained through global demand constriction. At this point some countries may loosen the peg. I think this will trigger a currency pressure through naked positions or high stake currency bets.

    Net-net
    I think we might see cycles of inflation and deflation compressed in short periods of times. Consumer prices may not be as impacted as it takes time to transmit through the system.

    then again it seems all weird and confusing.

  5. Anonymous says

    “Edward here. This might make for good headlines on Bloomberg, but it is patently false. The United States is not now or ever going bust.”

    Edward, You are arguing form over substance…..technically the US cannot go bust, although (at least theoretically), if we have a major dollar crisis with a big backup in rates (medium to long part of the yield curve), and therefore a deflationary spiral (this is not my view), the US government would go “bust”. In other words, the mkt will force the us to stop providing massive QE (printing money), by killing the dollar and preventing the government to honou its obligation?.

  6. Edward Harrison says

    When I talk about secular consumer price inflation, I mean prices rising due to an increase in consumption demand that outstrips supply. That is secular – and this is not what we are going to see with capacity levels low, hours worked low, labor force participation rates low and so on and so forth.

    What we can see is cyclical inflation – with import prices due to a falling dollar and money printing being transmission mechanisms. An inflationary environment will invite a response by the Fed – making the deflationary trend more powerful in my view. We are not off to Zimbabwe.

    See my piece on Scylla and Charybdis for more on this:

    https://pro.creditwritedowns.com/2009/06/central-banks-will-face-a-scylla-and-charybdis-flation-challenge-for-years.html

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