Saturday, December 15, 2012

Marc Faber Unleashed

Marc Faber of the GloomBoomDoom Report is one of my favorite economists not just because he is one of the rare economists who understand markets rather than just theory, but because his track record proves he sees what's happening and what's coming. Dr. Faber is one of the few that saw the 2008 crisis coming.

In the extended interview below he gives his opinion on many subjects and explains the source of the crisis, a subject either not understood or ignored by most of the media. Its a 50 minute interview that I believe is worth your time, but if you don't have the time, here are the quick notes:

  • Credit from 2000 to 2007 expanded by 4.2 Trillion economy total credit by 21.3T (note: this means $21 Trillion of new credit was needed to create $4 Trillion in new growth. The same .2 negative multiplier I've noted previously in a Charle Biderman interview.)
  • Credit expanded at 5 times GDP, i.e. $1 dollar of debt created .20 of economic output.
  • QE is leading to higher wealth inequality.
  • Cost of living in the US rising at 5-8%
  • US Government bonds are a bubble that will burst one day.
  • Student loan debt is now over $1 Trillion is also a bubble.
  • Canadian real estate is in a bubble, especially in Vancouver.
  • To believe China doesn’t have economic cycles is a fallacy. In my view it is hardly growing and could crash.

The interview is very interesting but the one thing I thought was most important was the above description of how it now takes $5 of new debt for every $1 of new economic activity in both the private and public sector. This is proof of the debt saturation of our economy and once again shows why Obama's $800 Billion stimulus was a failure. Its also very instructive of what we might expect if we go over the "fiscal cliff". If government spending is cut it is believed by all economist to have a negative effect on US GDP growth. But what the negative multiplier indicates is that each reduction of spending may have a far less impact on the economy than expected. The converse of the negative multiplier implies that a $5 reduction in new deficit spending may only cause a $1 reduction in economic activity. Perhaps in the long run that's not such a bad thing.

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