"One day this whole credit bubble will be deflated very badly - you are going to experience a complete implosion of all asset prices and the credit system [8]..."
Via South China Morning Post [9],
Marc Faber was in fine form at the CLSA Investor Forum, dispensing his trademark gloom and doom. The final keynote was a tour de force of the history of debt, asset bubbles and financial markets in the 20th and 21st centuries.
"Unlike the '50s and '70s when there was relatively less overall debt, a financial market crash did not inflict great damage on the economy.
Debt levels are significantly higher these days, and so a market crash can inflict serious damage on economies.
We've gone through a period of huge asset inflation, in stocks, bonds, commodities, and real estate, and we essentially now have in the world, a huge asset bubble.
So everything is grossly inflated."
In addition there has since 2007 been:
"colossal asset inflation" in high-end goods...
In thinking about what the next big bubble will be, Faber said:
"The problem is I believe you and I are the bubble... the financial system is just too big, that is the problem.
Maybe we can't see where the next bubble is because we are the bubble - that is something to consider."
Faber thought economists should distinguish between economic growth where credit grows at the same rate as the economy, which he believes is sound compared with a situation where credit grows faster than the economy. Credit used in capital formation is more beneficial to an economy than if used for consumption, as is the case in the US.
"One day this whole credit bubble will be deflated very badly - you are going to experience a complete implosion of all asset prices and the credit system - but as to when -I don't know."
Advanced sign of the cracks in the system are already evident. A dollar of additional credit in the system created significant economic growth, but these days an additional dollar has very little impact.
"That is a sign that we have reached the end of monetary policy."
Another indication is when the US government has to issue treasuries to pay the interest on its maturing debt.
"That will be the end game - then you are dealing with a collapse in the currency."