Marc Faber, what are you worrying about?

Marc, you have been very quiet. What are you worrying about?

Faber: Have you got an hour? You are all wrong. You say you would do this or that if you were policymakers, but nobody says "I wouldn’t do a thing. I would let the market correct itself." The crisis in the U.S. happened largely because of government intervention that began 25 years ago. The government continuously implemented policies to boost consumption, when everyone should know that an economy will grow in a sustainable way through the implementation of policies that foster capital formation—that is, spending on infrastructure, R&D, education and the acquisition of plant and equipment. By fostering more baseball games, more TV shows, more talk shows, you aren’t going to create a vibrant, growing economy.

The government didn’t create more baseball games.

Faber: But it created policies to borrow more money. Through artificially low interest rates, it created a huge credit bubble, which led to a bubble in consumption, a symptom of which was the growth in the trade and current-account deficit from $150 billion in 1997 to more than $800 billion in 2006. Now it is around $600 billion, but if these policies continue it will remain at this level or grow.

So you’re really saying it’s the Fed’s fault.

Faber: What I am saying is that Archie [MacAllaster] lives in a dream world. I admire you all but you are all dreamers. The Federal Reserve was founded in 1913. Before that, throughout the 19th century, the U.S. had strong per capita income growth in a deflationary environment.

It also had huge financial panics.

Faber: That refreshes the system. Worldwide, we have two economies. Rich people and resource producers are doing incredibly well. The ordinary people aren’t doing all that well. In 1970 the U.S. controlled 28% of world manufacturing output and China had 4%. In 1990 the U.S. still had 22%, but Japan had come up in the ranks and China still had only 4%. Now the U.S. says it has 20%, and China, by its own account, has 19%. In the U.S., not much happened in the past 20 years. But in China, India, Vietnam, Russia and Brazil you can see huge progress. That said, I agree with Archie that U.S. stocks might outperform other stock markets—once in a century.

[Archie] MacAllaster: At my four-score-plus, I don’t have to wait too much longer.

Faber: History has shown that giant countries on the way down are very dangerous because they are desperate. But this year the U.S. has stabilized and is going to grow modestly.

One more thing: Janet Yellen, vice chair of the Federal Reserve, said about a year ago that if it were possible to push interest rates into negative territory, she would vote for that. This is a very important statement because it implies that the Fed will keep real interest rates negative as far as the eye can see. Negative real rates amount to expropriation and destroy one function of money: to be a store of value and a unit of account. If you measure the stock market not in dollars but gold, it is down 80% since 1999. I no longer regard the U.S. dollar as a valid unit of account. People shouldn’t value their wealth in dollars because one day, in dollars, everyone will be a billionaire.

Source: The 2011 Barron’s Roundtable, Part 1: Attention, Stockpickers (subscription only)