Marc Faber Exposes The Consequences Of A Dysfunctional Political System

Tyler Durden's picture

Submitted by Marc Faber via The Daily Reckoning blog,

As H.L. Mencken opined, 'The most dangerous man to any government is the man who is able to think things out for himself, without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane, and intolerable.'

It is no wonder that, according to a Gallup Poll conducted in early October, a record-low 14% of Americans thought that the country was headed in the right direction, down from 30% in September. That's the biggest single-month drop in the poll since the shutdown of 1990. Some 78% think the country is on the wrong track.

Some readers will, of course, ask what this expose about the political future has to do with investments. It has nothing to do with what the stock market will do tomorrow, the day after tomorrow, or in the next three months. But it has a lot to do with the future of the US (and other Western democracies where socio-political conditions are hardly any better).

I have written about the consequences of a dysfunctional political system elsewhere. In May 2011 I explained how expansionary monetary policies had favoured what Joseph Stiglitz called 'the elite' at the expense of ordinary people by increasing the wealth and income of the 'one percent' far more than that of the majority of the American people.

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I also quoted at the time Alexander Fraser Tytler (1747-1813), who opined as follows: 'A democracy cannot exist as a permanent form of government. It can only exist until voters discover that they can vote themselves largesse from the Public Treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the Public Treasury with the result that a democracy always collapses over loose fiscal policy, always followed by dictatorship'.

Later, Alexis de Tocqueville observed: 'The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money.'

To be fair to Mr. Obama, the government debt under his administration has expanded at a much slower pace in percentage terms than under the Reagan administration and the two Bush geniuses. In fact, as much as I hate to say this, Mr. Obama has been (or has been forced to be) a fiscal conservative.

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However, what 18th and 19th century economists and social observers failed to observe is that democracies can also collapse over loose monetary policies. And in this respect, under the Obama administration, the Fed's balance sheet has exploded. John Maynard Keynes got it 100% right when he wrote:

'By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some...

'Those to whom the system brings windfalls...become 'profiteers' who are the object of the hatred... The process of wealth getting degenerates into a gamble and a lottery... Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.'

The Fed takes great pride in the fact that US household wealth has now exceeded the 2007 high. However, I was pleasantly surprised when I recently attended a presentation by Larry Lindsey, at my friend Gary Bahre's New Hampshire estate. He unmistakably showed, based on the Fed's own Survey of Consumer Finance and Flow of Funds, that the recovery in household wealth has been extremely uneven.

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Readers should focus on the last column of Table 1, which depicts the change in household wealth between 2007 and 2013 by wealth percentile. As can be seen, the bottom 50% of the population is still down more than 40% in terms of their 'wealth' from the 2007 high. (Lindsey is a rather level-headed former Member of the Board of the Governors of the Federal Reserve System, in which capacity he served between 1991 and 1997.)

Besides the uneven recovery of household wealth among different wealth groups, a closer look at consumer credit, which is now at a record level, is also revealing. Furthermore, consumer credit as a percentage of disposable personal income is almost at the pre-crisis high.

But what I found most interesting is how different income and wealth groups adjusted their outstanding total debt (including consumer credit, mortgage debt, etc.) following the crisis.

Larry Lindsey showed us a table - again based on the Fed's own Survey of Consumer Finance and Flow of Funds data - which depicts total debt increases and decreases (in US$ billions) among these different income and wealth groups.

I find it remarkable that the lower 40% of income recipients and the lower 50% of wealth owners actually increased their debts meaningfully post-2007. In other words, approximately 50% of Americans in the lower income and wealth groups who are both voters and consumers would seem to be more indebted than ever. A fair assumption is also that these people form the majority of the government's social benefits recipients.

Now, since these lower income and wealth groups increased their debts post-2007 and enjoyed higher social benefits, they were also to some extent supporting the economy and corporate profits. But what about the future?

Entitlements are unlikely to expand much further as a percentage of GDP, and these lower-income recipients' higher debts are likely to become a headwind for consumer spending. Simply put, in my opinion, it is most unlikely that US economic growth will surprise on the upside in the next few years.

It is more likely there will be negative surprises.

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TeamDepends's picture

Bitcoin will save us!

tsx500's picture

How about this : Maobama's approval rating LOWER than Toronto Mayor Ford's !!

ZerOhead's picture

"It is more likely there will be negative surprises."

In "Because Obama-land" negative surprises are actually GOOD surprises... for the finance, rape & pillage sector of the eCONomy anyway...

Joe Davola's picture

Larry Lindsey and Gary Bahre - was this the "oh look how bad the peasants have it, we should do something" meeting?  And by "something" did they mean "build a higher fence"?

El Oregonian's picture

"It is more likely there will be negative surprises."

Also, a "negative surprise" is reaching down and finding out the sweet fox you brought home actually had a package that they conveniently hadn't mentioned.

ZerOhead's picture

I know a Greek guy who would look at that as a 'bonus'...

Sparkey's picture

Msyor Rob Ford's ratings are climbing, Ford connects with the common man, the Canadians I know love him, He has staying power.

It is oft remarked, here on ZH, how Main Stream broadcast reality is morphing into the Reality TV format, Mayor Rob Ford is Canada's greatist Reality TV star, the same named Actor who plays the role plays it with flair, elan and Genius.

The script is broadly a morality play, there are many hints of epiphany and redemption to come, perhaps after he is discharged fro a alcohol drug rehabilition center, he can declare himself sin free and take a stroll acros the harbor, to convince the doubters.

Big things are happening in Canada, keep your eyes focused here!

SWRichmond's picture

Bitcoin will save us!

So TPTB are running out of gold so they want us to buy Bitcoins?  RIIIIIIGGGHHHTT.


NOTaREALmerican's picture

Holy cow,  this will cause some Red Team dumbasses head's to exploded.

NoDebt's picture

The author tried very hard to make this a red/blue thing.  It won't fly here.  I think most on ZH have figured out this isn't about a few bad political choices by one party or another.  It's a systematic statist take-over of everything private and it's been running for more than just a little while.

NOTaREALmerican's picture

Re:   I think most on ZH have figured out this isn't about a few bad political choices by one party or another.

I suspect, next election, the Red and Blue Team dumbasses here will be battling with pointless bullshit.     A majority of humans have brains configured to match the Red and Blue Team bullshit.   That's why the Red and Blue Teams exists.    Like religions, the political teams exist because the particular styles of bullshit created by the various Teams is desired by large numbers of true-beleiving humans.   

pods's picture

I hate to agree, but you are absolutely correct.  In no time flat each team will pander enough that most will forget the past and dream of the future.

Happens every single time.  Like clockwork. 

And most will happily consent to this system by voting for the guy who says he will change it.  And of course you will hear people speak of cancelled elections, like that is somehow going to happen. Elections are the great safety valve on our system. For it gathers consent for the system no matter who wins.


KnightTakesKing's picture

So what expenses are not counted in Table-2? There is so much off-book liabilities that I call bull shit on the CBO numbers.

LawsofPhysics's picture

Growth in what Mr. Faber?  Be specific.  I am confident that financial "products" of mass destruction will continue to grow...

bitcoin for your thoughts Mr. Faber...

corporatewhore's picture

although i enjoy reading mark's prognoses, he sounds like a broken record.  i like the beat but the words don't connect with me all the time i'm dancing.

Wilcox1's picture

I hope some people up there can hear Marc Faber

Hohum's picture

Only 14% think we're headed in the right direction?  How can that be?  The stock market is soaring! /sarc.  Time to change the sample.

Jack Burton's picture

I read so many posts railing against Obama the socialist give away artist. Handing out billions to the worthless deadbeats while taxing productive Americans out of the country. Yes, this sounds good, it plays very well with us libertarian minded folks. I even believe it some days. I want to believe it as an explaination for Americas economic collapse. But then I go to the numbers, the real hard data points, some of which appear above. Then the story changes. I am old enough to remember the skyrocketing of debt under Reagan, the Bush's years of borrow and spend. Clinton's total sell out to corporate interests with the banking and financial deregulation and the tarde treaties that handed control to globalized corporations and speeded up the transfer of the US manufacturing economy to China. Since I gotta run to work, I can't elaborate like I wish. I can only say, look at the numbers, run the numbers. You will see a complete transfer of wealth to the top 1% and a very, very good economic situation for the 9% below them. Income rise, since Reagan their taxes have fallen, not to mention tax havens and loopholes reduce that often even further.

Look at the money, look at incomes. They tell a different story than Obama king of socialists. No rich man is being taxed out of America, their taxes are lower now than in modern history. Corporations are free to do nearly anthing, and they write the regulations now, even under Obama.

Please, I beg you, give up the Republican talking points, yes, they are good for team red, but they are not true for the most part. Obama fucks the poor and the middle class with a ten foot pole up their asses on a daily basis. Numbers don't lie. All income growth goes to the top. How is that fucking socialism. ??????????????????

Jack Burton's picture

Dogmatic political talking points as presented by the Republican party are a useless exercise. Except to get team red elected. Team blue appeals to liberals with social issues, like Obama, and the turns over America to corporate control and is a crazed war monger. Fuck team red, fuck team blue! Get over that, and you will see the light!

NOTaREALmerican's picture

Re:  Get over that, and you will see the light!

Yeah, but it's nearly impossible because what we call the "left" and "right" are actually addictions (political/economic OCD).   No different than believing in an imaginary guy-in-the-sky.    We're stuck with Red and Blue forever.

sixsigma cygnusatratus's picture

Unfortunately, it appears that the average person has been conditioned to view politics as an extension of sports. 

Personally, I don't believe in anything anymore, I just believe in John & Yoko.  And I'm still not sure about Yoko...

tvdog's picture

Beatles were evil. You don't get a knighthood from the Queen unless you've performed a service to the state.

Learn more and know less's picture

"Your Majesty, I am returning this (MBE) in protest against Britain's involvement in the Nigeria-Biafra thing, against our support of America in Vietnam and against Cold Turkey slipping down the charts. With Love, John Lennon of Bag."

29.5 hours's picture



"We're stuck with Red and Blue forever."

Hmmm...if you really believe that then there is no use complaining about the political system and the insane financial policies correlated with the politics. We may just as well curl up in a dark spot and evaporate like money entrusted to Corzine.



NOTaREALmerican's picture

Re:  How is that fucking socialism.

The Red Team loves to use the word "socialism" the Blue Team loves to use the word "fascism".    

We actually (probably) just got feudalism, but, we've got the happiest peasants in the history of feudalism, so that is truely an accomplishment we can be proud of.

MachoMan's picture

We have self interest...  how it manifests itself is of little consequence because, in the end, they're all the same.  In capitalism there is never widely distributed capital, just as in communism there is never widely distributed capital.  It's kind of like a drowning man describing the different states of euphoria before his death...  an interesting exercise for sure, but ultimately pointless.

Ferrari's picture

I was wholeheartedly agreeing with you until I read the last clause of your last sentence. I don't think We The Peasants are at all happy. They just can't quite understand that they are unhappy, so they constantly fake the smile. And the fake happiness act might be wearing thin too. I work with some very clueless people, but the receptionist, who is salt of the earth, yet utterly clueless, told me the other day she was open to revolution. The peasants are displeased, although not yet expressing it. This society is a dutch chocolate apple: ready to fall apart at the slightest tap.

Missiondweller's picture

I think the above post is mistaken.

Under Reagan deficit spending hit a high of 5.5% of GDP.

Under Obama, Its been around 11% of GDP until this year when the tax hikes went into effect that republicans agreed to this time last year. We are still above the 5.5% high of the Reagan years.

RockyRacoon's picture

Your argument would be valid if GDP were a constant.  It's not.  The ways to calculate it have changed, so the equation is not the same.   Classic apples-n-oranges thingy.

koncaswatch's picture

I believe the article post spoke to the rate of Obama inspired spending/debt growth... "debt under his administration has expanded at a much slower pace in percentage terms than under the Reagan administration "

Your GDP to debt statement stands on its own merits. That is of course if you accept the voracity of the GDP figures. I think your numbers would look more gruesome if John Williams' Shadowstats were used.

29.5 hours's picture



"I think the above post is mistaken."

Hold on in your defense of Reagan. A recent chart posted in ZH showed that Reagan is still the hands-down champion for increasing the national debt. He increased it by about 190% while Obama (such an amateur) wimps out at 40% (so far).



NoDebt's picture

"I find it remarkable that the lower 40% of income recipients and the lower 50% of wealth owners actually increased their debts meaningfully post-2007. In other words, approximately 50% of Americans in the lower income and wealth groups who are both voters and consumers would seem to be more indebted than ever."

I don't.  When you got nothing left to lose, who cares how much debt you rack up?  You're screwed either way.

Now all we need are laws that require children to be responsible for their parents' unpaid debts upon their death and we'll really have this scam locked down tight.

MachoMan's picture

Exactly.  The other issue is that if you know that you'll need to bribe the mob to keep the pitch forks and torches at bay, then why not bribe them with debt?  At the end of the day, as creditor you have the right to be apathetic to collection efforts...  If you must provide them with bread and circuses, why not do it on credit...  the worst that could happen is that they don't repay you...  which you didn't expect anyway...  [of course this only works until the entire system is in jeopardy]

ebworthen's picture

The "negative surprises" are what all the DHS bullets and FEMA camps are for.

yogibear's picture

They have over 2 billion rounds of fresh ammo to use.

ebworthen's picture

O.T. but Mandy Drury showing some nice cleavage on CNBC today.

Funny discussion about Mulally of Ford taking over at Microsoft and maybe they'll spin off Bing and XBOX.  DUH. 

Yeah, and while they're at it add airbags to Windows 8.

screw face's picture

MOAR COUP........

Spontaneous Order's picture

"To be fair to Mr. Obama, the government debt under his administration has expanded at a much slower pace in percentage terms than under the Reagan administration and the two Bush geniuses."

That's true nominally, but it's a logical fallacy and is misleading. If you adjust for inflation, subtract interest payments (because they are spending that isn't due to the current president's spending), subtract defense outlays due to previous presidents, and subtract TARP spending (and repayment) Obama is actually the second biggest spender since LBJ (Nixon is first). While every change in the data except defense outlays improved Obama's standing, the bailout subtraction made his primary spending growth 7.0% per annum. The bailouts at the end of FY 2009 artificially increased Bush's spending and set a higher benchmark, while the repayment occurred in Obama's first term and counted as negative spending.

Additionally, if you use a cruder measure of fiscal restraint (average spending/GDP) Obama comes out on top of the last five presidents at 24.1% (Reagan was second with 22.4%).


Bosch's picture

0bama's total fucking of the budget doesn't kick in, conventiently, until he is well out of office. 

Joe Davola's picture

What are these budget things you speak of?

hungrydweller's picture

Only 14% think we are on the right track and yet 90% of the same bozos in DC will be re-elected. Go figure. As for my part, the 14% are correct.  The country is headed down s swirling shithole vortex which is exactly what is needed - a great reset.

youngman's picture

Obamacare will be an extra trillion a year in expenses...let alone it will kill millions of people before they should...

NOTaREALmerican's picture

Re:  Obamacare will be an extra trillion a year in expenses

One person's "expense" is another person's "income".  

RomneyCare pumps government loot directly into the hands of the insurance companies.        So,  just another way to pump loot to the top 10%.    Just like Big-MIC or Big-AG or Big-Water,  or any of the rest of the Big-Gov scams.  

That's the entire POINT of the article.

vote_libertarian_party's picture

That damn right winger Obama and his 'small gvt' dogma.



therearetoomanyidiots's picture

Fuck this prattle.  Anyone that tries to tell me Obama hasn't blown up the spending is in league with the devil.  The devil being the polluted corrupt system we have now. 

As "Bosch" contributes below, most of the real damage done by Obama happens in the 'out years'.  

Bazza McKenzie's picture

Reagan ran up debt while fighting, and bloodlessly winning, the only war since independence to ever seriously threaten the continental United States, and indeed the only one to ever threaten it with annihilation.

Proportionately, the US ran up far more debt during WWII, which never threatened the continental US, and then afterwards brought the debt situation under control.  No one criticizes FDR or Truman for running up the debt under those circumstances.  The problem lay not with Reagan but with his successors who failed to reduce expenditure when the Cold War was over.

123dobryden's picture

blue team ha?    you seriously believe that russians posed a threat to continental United states? that already was protected by MAD? russians, that at that time were already "fighting" in ques for almost all consumer goods. How about that wasted capital was invested productivly in US, in infrastructure, production, new technologies, science at relativly free market?


US could now still continue its dominance, not to be slapped in the face by former spy, who shows muscle where no real muscle is, only steroids.

Well maybe USSR would collapse few years later, but this war was won at too high a cost, as with every almost every war regardless who wins