Marc Faber: Relax, This Will Hurt A Lot

Tyler Durden's picture

Marc Faber closed out this week's Agora Financial Symposium with a speech that pretty much recapitulated the view that the end of the world is if not nigh, then surely tremendous dislocations to the existing socio-political and economic landscape are about to take place (with some very dire consequences for the US). His conclusive remarks pretty much summarize his sentiment best: "We've had a trend for most of the past 200 years: GDP of countries like
China and India went down while the West surged. That's now changed.
Emerging economies will go up, and your children in the West will have
a lower standard of living than you did. Absolutely. We won't sink to
the bottom of the sea. But other countries will grow much faster than
us. The world is very competitive, and the odds are stacked against us.
Americans, with their inborn arrogance, will not let it go that easily,
so there will be lots of tension going forward." While long-time fans of Faber will not be surprised by the gloom and doom (not much boom) here, anyone else who still holds a glimmer of hope that at the end of the day the CNBC spin may be right, is advised to steer clear of Faber's most recent thoughts.

And while we do not have the full presentation yet, the salient points have been recreated below courtesy of the Motley Fool. For those who desire a far more in depth presentation from the inimitable Mr. Faber, we direct you to his June 2008 capstone presentation: "Where is the boom, and the doom" - link here.

On reality: My views are not all that negative. I
think they're just realistic. I want to face reality. You have people
like Paul Krugman who thinks we should have another bubble to pull us
out of this. He actually said that. But he said the same thing in 2001.
And you know how that turned out.

On unintended consequences: The Fed doesn't seem to
have learned anything at all from its mistakes. Their current policy of
cutting rates to zero is designed to create sustainable growth, but
they've created larger and larger volatility in markets. There are many
unintended consequences of their actions.

The oil bubble of 2008 is a good example. In 2008, the price of oil
went ballistic, but the U.S. was already in a recession [it began in
Dec. 2007]. There was no rational reason oil should have gone
ballistic. The Fed's easy money just fueled a bubble. It was like a
$500 billion tax on consumers courtesy of the Fed. That's the added
amount that it cost you, and it helped push consumers over a cliff in
late 2008.

On the Fed: The Fed doesn't pay any attention to
asset bubbles when they grow. That's their official policy. But they
flood the system with cash when bubbles burst. They only care about
bubbles when they crash. It's a very asymmetric response and it has
many unintended consequences.

Letting bubbles inflate and then fighting them when they burst
actually worked for a while. That's what makes it dangerous. It worked
in the '90s. But you shouldn't read too much into this: This period was
assisted by unusually favorable conditions. From 1981 until early last
decade, commodities were in a bear market after a bubble in the '70s
and early '80s. And interest rates were falling throughout the '80s and
'90s, too. They almost never stopped falling. That made Fed policy look
like it was working.

Bubbles can still happen without expansionary monetary policy. In
the 19th century, you had bubbles in railroads, for example. But today,
the Fed has created a bubble in everything -- in every single asset
class. This is an achievement even for a central bank. Stocks.
Commodities. Bonds. Real estate. Gold. Everything goes up when the Fed
prints. The only asset that goes down is the U.S. dollar.

On deflation: I'm a believer that the stock market
lows of March 2009 will not be revisited. You have people like Robert
Prechter who think the Dow will collapse to 700 because of debt
deleveraging. Debt deleveraging could happen, but the Dow will not fall
because of monetary policy. The Fed will keep everything inflated in
nominal terms. And if the Dow does go to 700, you'll have more to worry
about than your investments. All the banks will be bust. The government
will be bust. You don't want cash if massive deflation happens. On the
contrary: It will be worthless. You have to think very carefully about
hardcore deflation.

On credit addiction: In a credit-addicted economy,
you don't need credit to actually fall for there to be problems. All
you need is a slowdown in the growth rate, and you get big problems.
Now, the government and the Fed are aware of this, so they are creating
debt through fiscal deficits and monetization. That creates a hugely
volatile environment. In 2008, government credit creation was inferior
to private credit contraction, and asset markets tanked. In 2009,
government credit creation was higher than private contraction, and
asset markets went ballistic. Lately, government credit creation has
slowed, and asset markets have gone down. Now, the Fed is aware of
this, and it's only a matter of time before it throws more money into
the system. I guarantee this.

On what the Fed will do from here on out: The
easiest way to fix our debt problems is with 6% inflation per year.
That bails out everyone in debt. Interest rates will stay at 0% in real
terms forever, in my opinion. If inflation is 5% per year, the Fed will
keep interest rates at 5%; that's how you get 0% real interest rates.
Now, we could have debt contraction in the private sector, but it
doesn't matter. It will be more than an offset with government debt
creation. So it's not a good idea to be all in cash and out of stocks.
Cash is very dangerous when central banks want real interest rates at

On the rest of the world: The U.S. today is much
worse off than it was 10 or 20 years ago compared with the rest of the
world. The Asians should thank the Federal Reserve for this. The Fed
practically created the emerging market economies. The Chinese pegged
its currency to the dollar in 1994, and until 1998 not much happened.
When the Fed began printing and boosting asset prices in 1998, there
was this huge debt growth, and U.S. consumers began spending at a
massive rate. That increased our trade deficit from $200 billion to
$800 billion. Of course, trade deficits have to be offset by trade
surpluses in other countries. So the Chinese began ratcheting up
production. Then their employment went up. Their wages went up.
Entrepreneurs began investing more money in capital spending. The Fed
is not the only factor that led to strong emerging market growth, but
it certainly was a major factor in it.

On delusions of grandeur: In the U.S., we still
think that we are the largest consumer market in the world. For some
services we are, but in general this is the wrong way to look at things.

There are huge differences in how statistics between countries are
produced. For one, the U.S. is the most leveraged. Other countries
factor this in. Also, consumption in the U.S. is 70% of GDP, but it's
almost all on domestic services. Spending on actual goods is only 20%
of consumption. In the U.S., we spend $600 billion a year on defense.
But $300 billion of this goes to personnel and retiree costs. In China,
the cost of personnel is basically nothing. When you adjust for
purchasing power, China probably spends about what the U.S. does on
military capital.

We also think that we have all the knowledge of the world. We think
that's our edge. But knowledge in countries with much larger
populations have the edge. Research now is being done in Asia because
it's cheaper there. Companies like Intel, IBM, and Microsoft are researching in Asia. It's just so much cheaper there. And they are
smarter than the U.S. in many ways, too.

h/t Ajay

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I am more equal than others's picture

"It will be worthless. You have to think very carefully about hardcore deflation."

Sort of like hardcore porn with a soft actor.

TwoShortPlanks's picture

Until the enevitable comes knocking on our doorsteps the Nay-Sayers will continue to claim victory as we have not crossed the finish-line, and we will never hear the end of it within public forums...conversely,if people the likes of Faber are correct, then there will be little or no public forums to speak of, and trolling through the history books to see who was right, who was wrong and how did it all come-about will be the last thing on people's agendas.

I know one thing for sure. It may take half a century or more, but people will eventually make no distinction between a Business Suit uniform and a Nazi SS uniform, they essentially represent the same thing.

If War is an extention of Politics by other means then, Politics is an extention of Economics by other means and further, Economics is an extention of Servitude by other means.

ATG's picture

"On deflation: I'm a believer that the stock market lows of March 2009 will not be revisited. You have people like Robert Prechter who think the Dow will collapse to 700 because of debt deleveraging. Debt deleveraging could happen, but the Dow will not fall because of monetary policy. The Fed will keep everything inflated in nominal terms. And if the Dow does go to 700, you'll have more to worry about than your investments. All the banks will be bust. The government will be bust. You don't want cash if massive deflation happens. On the contrary: It will be worthless. You have to think very carefully about hardcore deflation."

Interesting the same people who think the Fed inept, find it plausible the Fed will keep everything inflated...

Celsius's picture

Our tax dollars at work paying for blog propaganda trolls...

walküre's picture

you are the case in his point

before you even think about it... the USSR had an arsenal of nukes and it got them exactly where?

the USSR leadership never used the nukes when they realized their ship was sinking.

are you sure about that our arrogant leadership will accept defeat and let it go?

I'm not


unwashedmass's picture


would agree with you there. there are some "war" republicans that aren't going to let their no-bid glory train simply go away. case in point on this one, my senator, the great the only and only senator from halliburton, susan collins.

Citizen of an IKEA World's picture

You just made perhaps the most idiotic post on ZH I've ever seen.


But if that was sarcasm, bravo!

New_Meat's picture

unwashed-can't figure out how suzie and olie are war rinos. please fill us in. - Ned

FedUpGuy's picture

Sorry, I just can't let this stupidity pass.  Let's see what administrations were in office during the last 100 years of U.S. wars:

World War 1: Democrat Woodrow Wilson-- Campaigned as 'They guy who will keep us out of the war'

World War 2: Democrat Franklin Delano Roosevelt- Used the War to pull the U.S. out of the Depression that he prolonged for a decade

Korean War: Democrat Harry S. Truman

Vietnam: Democrat John F. Kennedy- Yeah, how'd this one work out?  Oh, and wasn't it a Republican that pulled us out of Vietnam?

Conflict in Yugoslavia: Democrat William Jefferson Clinton

Battle of Mogadishu: Bill Clinton kills 1500+ Somalis

Give me a break-- keep your anti-Republican attacks to yourself.


sharpcedge's picture

I think in the interest of staying fair and mentioning it all:

Iraq 1: Republican Bush I

Iraq 2: Republican Bush II

And there's talk of the US getting very interested in bombing Iran... if Obama looses the next elections (and he probably will he's so unloved in the US) then a Republican will take his place and create another war in the Middle East to potentially pull the US out of this economic crisis... who knows... but as you mention, war has been used before to pull an economy out of recession.

Just a thought.

Oh, and I'm not american so not Republican or Democrat...

nmewn's picture

Change your own diaper then.

Canucklehead's picture

Man, I just shake my head at your stupidity.  The world is reverting back to the 1800's with every tin pot dictator now feeling they can call the shots as the sherriff is leaving town. 

The world's townfolk will want to follow the sherriff as they have no backbone.  We are entering Gary Cooper's High Noon.

I agree with nmewn.  Change your own diaper.

FedUpGuy's picture

Absolutely right, but the original poster was arguing that Republicans are the warmongers, so he needed a little history lesson.


grunion's picture

Nor are you a very accomplished student of U. S. comparative history

TrulyStupid's picture

Comment on:  WW II pulled us out of a depression therefore all wars pull us out of depressions

Reality check: WWII is the only war that pulled ONE country out of depression and that was because:

Capital from the combatants fled to the US and was invested in production of real goods.

Wages were static, savings high, unemployment was minimal, taxes were high, dollars were backed by gold, prices were centrally controlled = manageable inflation

If we recreate these conditions, then we can pull ourselves our of depression. Engaging in another unfunded war, will only hasten insolvency.

BoeingSpaceliner797's picture

Poor crumbling left/right, Dem/'Pub, false paradigm didn't deserve the flogging you gave it, FedUpGuy.

VegasBob's picture

Oh, and wasn't it a Republican that pulled us out of Vietnam?


Not exactly.  A Democratic Congress finally grew a pair and cut off the money for the Vietnam War.  So President Gerald Ford had no choice but to pack up and leave.

grunion's picture

Tell the complete story! You revisionist!

RabidLemming's picture

there is no right and left, no republican or democrat, no good or evil these are all just different faces of the same propaganda machine.  free your mind of you rediculous preconceptions and you won't be afraid of the dark any longer.

on the other hand, maybe there are 5 fingers.....

MeTarzanUjane's picture

Claro. Full steam ahead for dialectical materialism.

fxrxexexdxoxmx's picture

I have no doubt that the Kenyan in the White House will use nukes in support of his faith, Islam.

nobita's picture

obama is a lying sack of shit as far as im concerned, but i don´t think he is a muslim.

after all the army he commands is still at war with muslims. he would be killing his own, it makes no sense.

you should ask people from the middle east if they think he is on their side, they were suckered just like the rest of us by his cairospeech. and just like us i think they are quite disillusioned.

by "us" i mean the western world in general, i know a lot of readers here were not impressed with him.

russians you might remember also saw right thru him according to polls there. i guess they know when they are being lied to.

MeTarzanUjane's picture

Muslim, LoL. Complete stupidity brought to you by israelman.

Hey, every time I pass through the airport I just have to thank israel. Thank you for bringing your bullshit religious wars to the USofA. Thank you for giving us the TSA, the collar and the leash.

Seer's picture

Take away oil and the US will be a bunch of pussies.  There!

In the future I'd advise against painting with a broad brush.

IBelieveInMagic's picture


As I wrote in a different thread, the growth story can be continued only if the US passed on the "burden" of consumption to an economy with real potential growth, read China. But, for China to step up to the plate, they will demand the privilege of having the reserve currency status if they are to open their consumer market. That would also cause the USD to devalue and will make the US economy competitive (of course we will get a taste of third world labor rates).

But, the US is addicted to the reserve status (think bloated defense spending and overfed financial sector) and will not give up even if it is the most logical step. The US Treasury Secretary has constantly exhorted China to increase domestic consumption but without agreeing to pass on the baton of reserve status. China will not open it's market without greater weightage for their currency (namely denomination of energy and commodities in yuan).


Kayman's picture

You certainly do believe in magic.  The problem is not whether the U.S. would concede (a little or a lot) to China.

The problem is- who would accept Chinese currency and chinese promises to pay ?

Deceit and Larceny do not a foundation make.

Perhaps you could give your children a little melamine laced milk.

laughing_swordfish's picture


What about OUR currency and promises to pay?

The only difference between us and the Chinese in that regard is that we can inflate both away to the point of nominal default - something that they would do in a heartbeat were they to obtain Reserve Currency Status.

Remember, we can stiff our creditors either the hard way or the easy way. Outright default would have all sorts of unintended consequences, but not so cranking up the printing presses.

Only problem with "inflating" our way out of the debt crisis is that the "unintended consequences" of that are even worse....


KrvtKpt laughing swordfish

DKM Trading Division

Iam_Silverman's picture

"The only difference between us and the Chinese in that regard is "

They still have enormous amounts of resources both within their own boundaries, as well as leased/purchased overseas.  I also consider their massive workforce (which appears to be more willing to work than others) to be a part of their resources.

I agree that they also carry a great amount of debt - but lets see what they spent their money on:

1) infrastructure.  Sure they built whole cities no one is living in - yet.  But if they get cut off from international funding, and their masses get unruly, give them a free apartment!

2) building factories.  Even after all of the foreign investors leave in disgust, their investment will stay.

3) developing their banking industry.  Instead of giving their banks free money to burn in prop trading, they expanded into different areas they couldn't before easy money made it possible.

Now, in the long run will this leave them on the top of the heap after a systemic, world-wide failure?  I don't think so, but they may end up higher in the pile than us or Europe.

DaveyJones's picture

...and massive energy / alternative energy structures. And instead of invading a country on false premise to try and get their resource, they just buy it. I hear that saves a little cash and a lotta lives.

New_Meat's picture

we grilled swordfish on the grille tonight-really tasty, thanks.  Matter of timing and who falls first, tonight, (er, yesterday) the swordfish got on the boat.  We're still here.

- Ned

IBelieveInMagic's picture

Unfortunately, it could be said the same about the US re GMO and shipping of toxic junk the world over.

Of course, our fart always smells better :)

Clancy's picture

I get paid in RMB and I consider myself fortunate.


The Chinese government is ruthless and uncaring, but at least they aren't sucidally stupid. 

vxpatel's picture

What if they don't want the burden of consumption...then what?

Kayman's picture

Take away Seer and there would be a shortage of non sequiturs.

Taking away oil (Middle East,especially) would be the best thing to happen for the U.S.

And stop bringing in Chinese crap.

Bingo- no more trade deficit. Americans would have to pull themselves up by their bootstraps, as they have always done.

And for Seer, while cheerleading for the tinpot dictators of the world, he can watch the grand edifices collapse in their crappy foundations.

Blankman's picture


whole heartedly agree.  China does not have a middle class to support any kind of foolish spending on damned stupid items they don't need.  America has a vast and foolish middle class who spends whether they have money or not.  

Captain Obvious's picture

Your so wrong it's not even funny, China has the biggest emergine middle class on the planet. Yes a massive amount live below the poverty line, but massive investments in infrastructure and agriculture is change the lifes of these people day by day. And when I say investment I mean it, I heard reports on the news (I live in China) that they were investing 1.5 trillion or there around, in the rural areas and farming.

Now the main difference is really the amount of money you need to earn to be considered middle class in China, comparatively to the west it seems like they earn nothing. But 'nothing' goes along way here..

Mitchman's picture

A lot of that investment was put up by local councils with more than their fair share of corruption as only they can do it in the Far East and, according to Bloomberg last night, about 25% of that 1.5 trillion is already bad debt.

Clancy's picture

We're in a position to lecture other countries on corruption now?  Do you hear yourself?

DaveyJones's picture

here in america, where bigger is better, we like to keep our corruption on a massive national level

Hedge Jobs's picture

Captain, is that massive investment in infrastructure the same infrastructure that the chinese government is forcing the banks to write off 30% of the money they lent out to fund it becuase it is uneconomic?

Doesnt look like this massive investment in infrastrucure has been such a great investment. more like a massive fuck up to me.

people like you beleive this is "sutainable growth" i think you might be dissapointed.


Mark Noonan's picture

Rural population:  US - 19%; China - 55%.

Population 0-14:  US - 20.2%; China - 19.8%.

Birth rate:  US - 13.83; China - 13.45.

Sex ratio:  US - 1.05 males/females; China - 1.11 males/females.

Infant mortality:  US - 6.22; China - 22.12.

China's massive and still mostly rural population is caught in a demograhic bind.  They are going to rapidly age and have a huge population of men who simply won't be able to marry and have children simply because China's anti-human "one child" policy has ensured that a generation of women were murdered in the womb.

These demographic facts tell the tale of what won't happen - there won't be the people necessary to change the harsh facts of China's true economic life - such things as the fact that only about 5% of rural homes have a flush toilet.

And as for their middle class - actually, they are the worst off; having fewest children, aging fastest and, given the various bubbles, most heavily over-leveraged.

Suisse's picture

So China's population can increase indefinitely? Population must age, otherwise it is increasing. When is it too much, 2 billion, 3 billion, infinite growth forever?

Mitchman's picture

Yes.  But with all due respect, the government in China spends it on behalf of the middle class on empty cities the world's largest (and emptiest) shopping center and a whole mittful of bridges to nowhere.

Clancy's picture

This is what happens when you get all your news from zerohedge. 

Mitchman's picture

Nah.  I did not "junk" you but the overbuilding stories are the stuff of legend in the MSM including Bloomberg and the NYT, hardly fever swamps of deflationist paranoia.

Rusty Shorts's picture

Hedge Fund Manager Hugh Hendry Brief Report on the state of the Chinese Economy in Early 2009

ToNYC's picture

Marc Faber doesn't here directly state that the middle class no longer is a viable socioeconomic reality. This is not a bad thing. The bubblicious middle class ignored the lessons of the 1920's and 30's and played grasshopper. Guess what? Aesop still has his Fables. Embrace reality by whatever shaman you need to effect the transformation; be assured you are way ahead of the Pack.

New_Meat's picture

dude-we have experience with the "take away foreign" stuff.  Smoot-Hawley?  Hubcap theory?  - Ned

IBelieveInMagic's picture

Taking away oil (Middle East,especially) would be the best thing to happen for the U.S.

And stop bringing in Chinese crap.


Easier said than done. The USD works in the context of a global trade -- if others can't "earn" USD, the USD reserve status will be caput. The commodity countries accept USD not out of love (fear, yes) or because the expectation of being able to import anything from the US, but because they expect to import from other countries (India, China). If the US restricts imports, the global trade game is over and we will be back to bilateral trade arrangements (already it is beginning to happen at the margins such as China and Brazil agreeing to trade in the respective currencies).

The only way to keep this global trade game going a little longer is to continue importing ourselves to irrelevance. Either way, the future is grim.