Marc Faber Warns "Karl Marx Was Right"

Tyler Durden's picture

Authored by Marc Faber, originally posted at The Daily Reckoning,

I would like readers to consider carefully the fundamental difference between a “real economy” and a “financial economy.” In a real economy, the debt and equity markets as a percentage of GDP are small and are principally designed to channel savings into investments.

In a financial economy or “monetary-driven economy,” the capital market is far larger than GDP and channels savings not only into investments, but also continuously into colossal speculative bubbles. This isn’t to say that bubbles don’t occur in the real economy, but they are infrequent and are usually small compared with the size of the economy. So when these bubbles burst, they tend to inflict only limited damage on the economy.

In a financial economy, however, investment manias and stock market bubbles are so large that when they burst, considerable economic damage follows. I should like to stress that every investment bubble brings with it some major economic benefits, because a bubble leads either to a quantum jump in the rate of progress or to rising production capacities, which, once the bubble bursts, drive down prices and allow more consumers to benefit from the increased supplies.

In the 19th century, for example, the canal and railroad booms led to far lower transportation costs, from which the economy greatly benefited. The 1920s’ and 1990s’ innovation-driven booms led to significant capacity expansions and productivity improvements, which in the latter boom drove down the prices of new products such as PCs, cellular phones, servers and so on, and made them affordable to millions of additional consumers.

The energy boom of the late 1970s led to the application of new oil extracting and drilling technologies and to more efficient methods of energy usage, as well as to energy conservation, which, after 1980, drove down the price of oil in real terms to around the level of the early 1970s. Even the silly real estate bubbles we experienced in Asia in the 1990s had their benefits. Huge overbuilding led to a collapse in real estate prices, which, after 1998, led to very affordable residential and commercial property prices.

So my view is that capital spending booms, which inevitably lead to minor or major investment manias, are a necessary and integral part of the capitalistic system. They drive progress and development, lower production costs and increase productivity, even if there is inevitably some pain in the bust that follows every boom.

The point is, however, that in the real economy (a small capital market), bubbles tend to be contained by the availability of savings and credit, whereas in the financial economy (a disproportionately large capital market compared with the economy), the unlimited availability of credit leads to speculative bubbles, which get totally out of hand.

In other words, whereas every bubble will create some “white elephant” investments (investments that don’t make any economic sense under any circumstances), in financial economies’ bubbles, the quantity and aggregate size of “white elephant” investments is of such a colossal magnitude that the economic benefits that arise from every investment boom, which I alluded to above, can be more than offset by the money and wealth destruction that arises during the bust. This is so because in a financial economy, far too much speculative and leveraged capital becomes immobilized in totally unproductive “white elephant” investments.

In this respect, I should like to point out that as late as the early 1980s, the U.S. resembled far more a “real economy” than at present, which I would definitely characterize as a “financial economy.” In 1981, stock market capitalization as a percentage of GDP was less than 40% and total credit market debt as a percentage of GDP was 130%. By contrast, at present, the stock market capitalization and total credit market debt have risen to more than 100% and 300% of GDP, respectively.

As I explained above, the rate of inflation accelerated in the 1970s, partly because of easy monetary policies, which led to negative real interest rates; partly because of genuine shortages in a number of commodity markets; and partly because OPEC successfully managed to squeeze up oil prices. But by the late 1970s, the rise in commodity prices led to additional supplies, and several commodities began to decline in price even before Paul Volcker tightened monetary conditions. Similarly, soaring energy prices in the late 1970s led to an investment boom in the oil- and gas-producing industry, which increased oil production, while at the same time the world learned how to use energy more efficiently. As a result, oil shortages gave way to an oil glut, which sent oil prices tumbling after 1985.

At the same time, the U.S. consumption boom that had been engineered by Ronald Reagan in the early 1980s (driven by exploding budget deficits) began to attract a growing volume of cheap Asian imports, first from Japan, Taiwan and South Korea and then, in the late 1980s, also from China.

I would therefore argue that even if Paul Volcker hadn’t pursued an active monetary policy that was designed to curb inflation by pushing up interest rates dramatically in 1980/81, the rate of inflation around the world would have slowed down very considerably in the course of the 1980s, as commodity markets became glutted and highly competitive imports from Asia and Mexico began to put pressure on consumer product prices in the U.S. So with or without Paul Volcker’s tight monetary policies, disinflation in the 1980s would have followed the highly inflationary 1970s.

In fact, one could argue that without any tight monetary policies (just keeping money supply growth at a steady rate) in the early 1980s, disinflation would have been even more pronounced. Why? The energy investment boom and conservation efforts would probably have lasted somewhat longer and may have led to even more overcapacities and to further reduction in demand. This eventually would have driven energy prices even lower. I may also remind our readers that the Kondratieff long price wave, which had turned up in the 1940s, was due to turn down sometime in the late 1970s.

It is certainly not my intention here to criticize Paul Volcker or to question his achievements at the Fed, since I think that, in addition to being a man of impeccable personal and intellectual integrity (a rare commodity at today’s Fed), he was the best and most courageous Fed chairman ever.

However, the fact remains that the investment community to this day perceives Volcker’s tight monetary policies at the time as having been responsible for choking off inflation in 1981, when, in fact, the rate of inflation would have declined anyway in the 1980s for the reasons I just outlined. In other words, after the 1980 monetary experiment, many people, and especially Mr. Greenspan, began to believe that an active monetary policy could steer economic activity on a noninflationary steady growth course and eliminate inflationary pressures through tight monetary policies and through cyclical and structural economic downturns through easing moves!

This belief in the omnipotence of central banks was further enhanced by the easing moves in 1990/91, which were implemented to save the banking system and the savings & loan associations; by similar policy moves in 1994 in order to bail out Mexico and in 1998 to avoid more severe repercussions from the LTCM crisis; by an easing move in 1999, ahead of Y2K, which proved to be totally unnecessary but which led to another 30% rise in the Nasdaq, to its March 2000 peak; and by the most recent aggressive lowering of interest rates, which fueled the housing boom.

Now I would like readers to consider, for a minute, what actually caused the 1990 S&L mess, the 1994 tequila crisis, the Asian crisis, the LTCM problems in 1998 and the current economic stagnation. In each of these cases, the problems arose from loose monetary policies and excessive use of credit. In other words, the economy — the patient — gets sick because the virus — the downward adjustments that are necessary in the free market — develops an immunity to the medicine, which then prompts the good doctor, who read somewhere in The Wall Street Journal that easy monetary policies and budget deficits stimulate economic activity, to increase the dosage of medication.

The even larger and more potent doses of medicine relieve the temporary symptoms of the patient’s illness, but not its fundamental causes, which, in time, inevitably lead to a relapse and a new crisis, which grows in severity since the causes of the sickness were neither identified nor treated.

So it would seem to me that Karl Marx might prove to have been right in his contention that crises become more and more destructive as the capitalistic system matures (and as the “financial economy” referred to earlier grows like a cancer) and that the ultimate breakdown will occur in a final crisis that will be so disastrous as to set fire to the framework of our capitalistic society.

Not so, Bernanke and co. argue, since central banks can print an unlimited amount of money and take extraordinary measures, which, by intervening directly in the markets, support asset prices such as bonds, equities and homes, and therefore avoid economic downturns, especially deflationary ones. There is some truth in this. If a central bank prints a sufficient quantity of money and is prepared to extend an unlimited amount of credit, then deflation in the domestic price level can easily be avoided, but at a considerable cost.

It is clear that such policies do lead to depreciation of the currency, either against currencies of other countries that resist following the same policies of massive monetization and state bailouts (policies which are based on, for me at least, incomprehensible sophism among the economic academia) or against gold, commodities and hard assets in general. The rise in domestic prices then leads at some point to a “scarcity of the circulating medium,” which necessitates the creation of even more credit and paper money.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
xamax's picture

The End is near.....

PhattyBuoy's picture

When does Bernanke get his just deserved "Nobel Prize in Economics" ?

Pinto Currency's picture

It is not a matter of a "capitalistic system maturing" that leads to a massive crash.

It is the creation of a crony capitalistic system on a basis of centrally planned fiat money that leads to a massive crash.

Seer's picture

No, it's the meeting of theory with the REAL world...

When we start off with the premise that we can have perpetual growth on a finite planet -which is impossible- then every fucking thing that is then built on top of that is "crony."  No one can define anything for swallowing that doesn't contain the word "growth."  Allowing things to be chopped down, as Faber suggests, won't, over the long-haul, keep us from melting down from total over-consumption of Natural Capital (the physical world): sure, it'll reduce the massive swings, but "steady as she goes," when growth is the model, will, nonetheless, have its come-to-Jesus moment with mother nature.

This shit was building up from 1971 when we hit the peak.  Anyone pretending that it's some recent infestation just isn't paying attention to history (and is doomed to fall victim to a repeat performance): and it goes back as far as you can find written records- power and greed, laws/rules are no match against claws and fangs...

Pinto Currency's picture


The infinitely increasing physical growth and consumption story is one that has been sold to us because the fiat money debt ponzi on which the economy has been built necessitates it.

These pyramid schemes are all the same as they all require continued exponental growth until they blow up - ask Bernie.

This fiat money debt pyramid is no different.


SafelyGraze's picture

what we need is a mission to mars

or a levitating train or something

also houses that clean themselves

Future Jim's picture

"the premise that we can have perpetual growth on a finite planet -which is impossible"

That is exactly what the crony media and crony academia want you to believe; however, you forgot about increased innovation and efficiency. we have had perpetual growth in computational power for centuries, and yet the resouces involved are flat. Likewise, we are growing 3 times the amount of food as in 1960 on the same amount of land.

11b40's picture

Is the water supply flat, as well?  Is the air as clean?  Is the Ocean?  Are there as many edible fish?  

Just a few basic questions about reality vs abstract concepts or mechanical improvements.

NidStyles's picture

Which is why I have been saying that the governments need to get out of the way so humanity can figure a way to solve those issues and how to get it's fat ass off this rock and start doing some explorations on suitable secondary locations for storing some of the more useless humans.

zhandax's picture

Humanity won't solve shit until these unfit beggars are so destitute that the noise level is low enough for rational discussion to take place.

brundlefly's picture

You of course understand that innovation cannot overcome the laws of thermodynamics and diminishing returns? Economic growth requires energy, not just capital or labor. We have used the highest quality fossil fuel energy as a replacement for human labor, and we are all rich. The production of conventional oil has not increased since 2005. We will soon be riding the downslope of Hubbard's peak, where oil shale and other low quality resources must be used and are slower and more difficult to produce. It used to take 1 barrel of oil to get out 100. Globally, we are now below 1:20. This means that the price of energy will continue its upward march because it will take more and more energy (and capital) to extract the last dregs of oil sludge. Food production increases were achieved using industrial agriculture (oil), using fertilizers mined and produced by oil. Hmm, it seems that if the rate of oil production cannot increase to meet the needs of an exponentially increasing population, we have a problem. That is just one of many limits to growth about to smack us in the face.

Future Jim's picture

What if we discovered the superconductors necessary to make fusion power feasible? Then you concern would sound as silly as the concern about running out of wood to burn hundreds of years ago.

Of course, the self-proclaimed Elites don't want unbridled innovation for obvious reasons.

Flakmeister's picture

And what if Unicorns could shit Rainbow Skittles....

Explain to us how fusion can be used to generate usuable energy....

Edits: All I hear are crickets.... Any of you fucktard junkers care to parade your ignorance for us?

BigJim's picture

I've been reading that fusion is a mere '10 years away'... for the last 40. It's a massive boondoggle for physicists... and the heavy industries that build their multi-billion dollar toys, and the politicians who get to look 'presidential' and 'visionary' when they vote for robbing present and future taxpayers to pay for it.

Liquid sodium Thorium reactors look very promising in comparison.

the tower's picture

We have what we need right now:

We don't need dreamers and futurists, we need people who do stuff right now.

Flakmeister's picture

I was at Carlo Rubbia's Energy Amplifier Talk at CERN back in the 90's...

Interesting, but it seems to have gone nowhere...

the tower's picture

Most real and actual innovations go nowhere.

This is because consortiums like Rockstar (there are many) are holding back progress... The most powerful companies in the world are hampering the evolution of tech on a massive scale.

The best thing that can happen to the world is the massive crisis we all so desperately wait for. It will break up power structures and invalidate patents, so we can finally move on.

Flakmeister's picture

No, it is very simple, when you discount the cost of a new facility it does'nt make sense given the value of your existing facilities... 

For much the same reason there are no significant refineries near the Tar Sands.... 

What you describe is collapse and I doubt very much if a high tech civilization will be reappearing anytime soon, if ever...

Flakmeister's picture

Call me when a single commercial reactor optimized for the Thorium fuel cycle is in operation...

You appear to have no comprehension of scale....

BigJim's picture

Call me when a single commercial Uranium or MOX reactor is in operation without having recieved massive subsidies from .gov

Oh! THAT'S why Thorium was sidelined - because it wasn't useful in the A-bomb making process.

Twatmeister strikes again.

Flakmeister's picture

Wrong....Look up Operation Tea Pot...

Do you really believe that any nuclear reactor is going to get built without massive state subsidy? Please do not insult everyones intelligence...

Bearwagon's picture

Don't have to look it up to know you're right. I heard that breeding of U233 has also been part of Indias program. (By the way, ain't it interesting that the critical mass is considerably smaller than that of U235?)  ;-)

the tower's picture

The future doesn't exist yet, though you heavily bank on it.

"What if" doesn't sound very scientific, making me think that you are disconnected from society.

Taking risks with humanity with a "what if" statement is rediculous.

How about we start living within our means and embrace scientific breakthroughs when/if they happen?

Wanna know how silly your thoughts are?

The future doesn't exist, so part of your nick doesn't exist either, so you're just "Jim". That's all.

daemon's picture

"It is not a matter of a "capitalistic system maturing" that leads to a massive crash.

It is the creation of a crony capitalistic system ...."

Let me tell you a story : " Once upon a time, a guy had a great idea to make money. Being an entrepreneur, he started a business. Some years later, his business had had such a huge succes that the guy had become multi billionaire; he had made (more or less voluntarily) a lot of friends in the government (because you know, sometimes it can be useful), he had made (more or less voluntarily) a lot of friends among other successful entrepreneurs (because you know, even when there is no government, there is always someone else to "corrupt").

In the end he had become a very rich, very powerful entrepreneur, .... and a very .... crony capitalist ."

The Mist's picture

Exactly! A sound money system would not require infinite exponential growth. A system without a central bank faking low interest rates wouldn't create massive bubbles. A system without a government interfering wouldn't award banks for fucking up and give them bailouts.

The problem is NOT capitalism! It's the god damn cronies.

BigJim's picture

In the end, the problem is the Demos (no, not 'Democrats', but the people in the polity) who confer enormous power onto their governments, making cronyism not only inevitable but essential for businesses not to get screwed by regulation... and wind up hijacking the regulatory process and screwing everyone else.

NidStyles's picture

I'm confused how was any of this Marx? Marx never said anything about any of this. In fact it was someone that came before Marx that attacked Financialization first. It was Bastiat second.

ParkAveFlasher's picture

So...when are the ninjas coming for our gold?

steelrules's picture

Always liked Ry Cooder, thanks I'll have to go through my old cassetts and give him another listen.

BigJim's picture

He's a great musician, and a very caring fellow, but like most intelligent caring people who have never bothered to pick up an economics textbook, a dreadful lefty 'progressive'.

Flakmeister's picture

This has the potential to be a very entertaining thread....

Time to fire up the popcorn maker...

BigJim's picture

I read somewhere that popcorn makers produce a LOT of poisonous CO2, thereby threatening our beautiful sacred Gaia with fireballs and tidal waves.

Shame on you!

earleflorida's picture

history can vindicate its past if not forsaken'd to fatalist

pcrs's picture

What capitalism is he talking about? The centrally planned economy from money supply to what you are allowed to grow in your garden and you get thrown in jail for collecting rain water on your own property ?

macroeconomist's picture

Pfff. That shows very clearly you have never read Marx or Hilderfing, or Gramsci. This is what capitalism evolves to, as a result of its dynamics. Marxists wrote that capitalism would turn into this 100 years ago.

If you are dreaming of an anarchistic capitalism with no monopolies, no powerful interest groups capturing the state, you had better wake up to reality.

blabam's picture

There would be no state silly...

macroeconomist's picture

Oh really? A capitalism without a state? 

Somethimes, the level of illiteracy on this blog astonishes me.

State is what ensures capitalist mode of production prevails and reproduces itself. Only a bunch of idiots like you might believe there can be a capitalism without a state, which protects private property.

Those bankers would be hanging on the trees now if there had not been a state which will imprison those who hang them ...

kaiserhoff's picture

Study the history of the American frontier.

We're going back to the future, those of us who make it.

jon dough's picture

Plus 1 for the Nektar, great band.

Wish I could find some Guru Guru, all I have are vinyl...

Ralph Spoilsport's picture

There seems to be a fair amount of Guru Guru on YouTube if you haven't checked.

Ghordius's picture

"Study the history of the American frontier."

yes, do that. in the context of what was happening elsewhere. the American Frontier was a sparsely populated backwater. in a low-pressure zone of the planet. while the rest of the planet was engaged in high-pressure imperial dominance fights on all levels, military, political, financial and economic

that's not "looking down the nose", that's just a fact. when did Commander Perry "visit" Japan, for example?

Seasmoke's picture

Protects private property....ha ha ha

macroeconomist's picture

Yes, not your private property, the capitalist class's private property. I cannot believe i have to explain everything like I am talking to a 15 year-old.

putaipan's picture

marx was right about henry george too ....