"We already live in a financial economy in which the debt and capital markets exceed the value of the real economy by far," Marc Faber explains to Germany's Finanzen100 [12], "and that's before the current formation of bubbles." His most ominous warning, and one that fits perfectly with the seeming insanity of Federal Reserve (and all developed market central banks) is that "the next time a bubble bursts, then the capitalist economic system as we know will falter."
Via Finanzen100 (Google Translate), [12]
The numbers speak for themselves: In 1980, the market capitalization of the U.S. stock market was less than 40 percent of gross domestic product (GDP). The debt, measured in credit markets, was about 130 percent of GDP. Today these figures are higher, according to Marc Faber many times: The market capitalization has reached over 100 percent of GDP, the debt about 300 percent. This is consistent with figures from the consulting firm McKinsey. After calculation, the global debt still stood in 2010 at 158 ??trillion. In 2012, there were already $ 200 trillion - and rising. This makes for a worldwide economic power of slightly more than $71 trillion about three times.
It is a powder keg on which we sit. In a normal real economy, said Marc Faber, the debt and equity markets are small - and there in order to steer the accumulated capital into investments. Net interest acts as a regulator. That is, there are only those made with the capital investment that is truly an attractive return, so a higher yield than fixed-income investments bring.
Speculative bubbles encourage innovation
However, it can also come here to the formation of speculative bubbles, as Faber points out. They are there but small, focused on little damage. On the contrary, you might even be necessary because they enabled quantum leaps in progress and can only increase the production capacity. Such a bubble bursts, then prices will fall, and so more consumers can benefit from the development. Examples give it enough: Whether the railroad boom in the twenties of the last century, the Internet boom in the late nineties or real estate bubbles. When prices dropped after the bursting of a speculative bubble, it benefited from broad sections of the population.
Such bubbles are therefore an integral part of the capitalist system. They promote the progress and increase productivity. But the decisive factor: In a real economy, the amount is limited to credit, as much as the real economic performance. Otherwise, with quasi unlimited credit available, investment is driven purely by liquidity - not real economics. And this is even more true when the market interest rate is distorted, as explained Cindy Sweeting of Franklin Templeton. The capital costs are no longer currently being determined by the market, but distorted by the intervention of central banks. Short-term financing costs are close to zero in nominal terms and negative in real terms.
Central banks override market mechanisms
The seemingly favorable debt financing and the affects it also on the decisions of the company. Incorrect or depressed capital costs can prevent new growth and lead to business transactions operate on, which should give it better. Insolvency and bankruptcies are mechanisms to ensure capitalism that no capital flows in companies that do not use it effectively. This mechanism is, however, set by the central banks suspended.
"The unintended consequences of the current artificial reduction and manipulation of interest rates and finance charges are potentially very serious," Sweeting explained: "The risk of asset price bubbles by cheap credit financing, the resolution of leveraged carry trades and the continued preference for cheap, financed on credit, investment in existing systems instead of productive and. because the capital costs are no longer determined by the market growth-enhancing investment in the creation of new facilities, many companies are able to finance subsidized low quality. "
Too much speculative and leveraged capital
...in an economy driven by liquidity accept this very different proportions. The benefit that instigate these bubbles can then be significantly lower than the destroyed by the bursting of such bubbles prosperity. Because there is too much speculative and leveraged capital within the game. There are just too many white elephant 'investments made.
The crises of the past decades due to Faber's view on interest rates too low. In every crisis, but the banks increased the dose they took a more expansionary monetary policy. The patient, however, the real economy, more and more immune to it. So the doctor increased the dose and on. Although the medicine brings temporary relief, but it does not eliminate the cause. The liquidity-driven economy, it is growing like a cancer, according to Faber and on. And that will, as Karl Marx predicted, lead to the ultimate collapse that will put the foundations of our capitalist society on fire.
How it will actually go out is open. Investors should nevertheless take the warning seriously, because the end result will be a violent crash in the capital markets.