Faber: For Sure There Will Be QE3 But Not Right Away
Here is a good 17-minute Bloomberg video with Marc Faber. He talks a lot about Mexico and he is bullish on that economy. As for the US, his view, like mine, is that printing money does give a temporary boost to economic activity. However, in the long run, it doesn’t lead to sustained economic growth because it creates a misallocation of resources by obscuring price mechanisms for those allocating capital. This is what’s happening now in commodities, junk bonds, pre-IPO social media companies and emerging markets. People are drawn to these segments because of a perceived Bernanke put.
As for QE3, Faber expects the Fed to continue down this path if and when the economy and asset prices correct downward. I agree. I see the Fed finishing QE2 and pausing to re-evaluate the state of the economy. If the economy or stocks have a relapse, the Fed will start up another program of quantitative easing. See my recent post on Thomas Hoenig for more in this vein.
Much more in the video below.
I have to agree with him on where US interest rates should be. I have felt that interest rates should have been much higher to shake out the last mal-investments from the last bubbles, yet we are maintaining them and many will learn the wrong lessons.
The US stock-markets are massively overvalued. The current PE are of a level that would normally be expected from a high growth company. Yet the Dow 30 has gone nowhere for the a decade.
I have to agree with him on where US interest rates should be. I have felt that interest rates should have been much higher to shake out the last mal-investments from the last bubbles, yet we are maintaining them and many will learn the wrong lessons.
The US stock-markets are massively overvalued. The current PE are of a level that would normally be expected from a high growth company. Yet the Dow 30 has gone nowhere for the last decade.
Ed: With a view to educating the sheeple, can I suggest you don’t use the phrase “money printing” in reference to QE? QE consists of swapping cash for Treasuries, and it is debatable as to how much difference there is between the two. Both appear on the liability side of the Fed’s balance sheet. Certainly Treasuries near maturity are essentially the same as cash.
I think the phrase “money printing” should be reserved for where a government / central bank machine goes for spending which is not covered by tax OR borrowing. Modern Monetary Theory advocates that governments should do the latter in a recession. And from time to time (i.e. during an inflationary boom), do the opposite, i.e. raise taxes, rein in money and “unprint it” or extinguish it.
The raising of taxes during a boom is what was proposed by Keynes to counter the effects of stimulus spending. Only problem it relies on governments actually raising taxes. That never happens. No governement wants to slow the boom and recover the stimulus. They want the glory of a booming economy. I do agree that it is needed but politicians never want to increase taxes unless absolutely necessary.
Ed: With a view to educating the sheeple, can I suggest you don’t use the phrase “money printing” in reference to QE? QE consists of swapping cash for Treasuries, and it is debatable as to how much difference there is between the two. Both appear on the liability side of the Fed’s balance sheet. Certainly Treasuries near maturity are essentially the same as cash.
I think the phrase “money printing” should be reserved for where a government / central bank machine goes for spending which is not covered by tax OR borrowing. Modern Monetary Theory advocates that governments should do the latter in a recession. And from time to time (i.e. during an inflationary boom), do the opposite, i.e. raise taxes, rein in money and “unprint it” or extinguish it.
The raising of taxes during a boom is what was proposed by Keynes to counter the effects of stimulus spending. Only problem it relies on governments actually raising taxes. That never happens. No governement wants to slow the boom and recover the stimulus. They want the glory of a booming economy. I do agree that it is needed but politicians never want to increase taxes unless absolutely necessary.