Marc Faber: The Perils of Money Printing's Unintended Consequences

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Marc Faber does not mince words. He believes that the money printing policies of the Federal Reserve and its sister central banks around the globe have put the world's currencies on an inexorable, accelerating, inflationary down slope.

The dangers of money printing are many, in his eyes. But in particular, he worries about the unintended consequences it subjects the populace to. Beyond currency devaluation, it creates malinvestment that leads to asset bubbles that wreak havoc when they burst. And even more nefarious, money printing disproportionately punishes the lower classes, resulting in volatile social and political tensions.

It's no surprise, then, that he's feeling particularly defensive these days. While he generally advises those looking to protect their purchasing power to invest capital in precious metals and the equity markets (the rationale being that inflation should hurt equity prices less than bond prices), he warns that equities appear overbought at this time.

On Inflation

First of all, I do not believe that the central banks around the world will ever, and I repeat ever, reduce their balance sheets. They’ve gone the path of money printing, and once you choose that path you’re in it and you have to print more money.

If you start to print, it has the biggest impact. Then you print more – it has a lesser impact, unless you increase the rate of money printing very significantly. And, the third money-printing has even less impact. And the problem is like the Fed: They printed money because they wanted to lift the housing market, but the housing market is the only asset that didn’t go up substantially.

In general, I think that the purchasing power of money has diminished very significantly over the last ten, twenty, thirty years, and will continue to do so. So being in cash and government bonds is not a protection against this depreciation in the value of money.

On His Love for Central Bankers

Basically the U.S. had a significant increase in the average household income in real terms from the late 1940s to essentially the mid-1960s. And then inflation began to bite, and real income growth slowed down. Then came the 1980s, and in order not to disappoint the household-income recipients, you essentially printed money and had a huge debt expansion.

So if you have an economic system and you suddenly grow your debt at a very high rate, it's like an injection of a stimulant of steroids. So the economy grew at a relatively fast pace, but built on additional debt. And this obviously cannot go on forever, and when it comes to an end, you have a problem. But the Fed had never paid any attention.

The Fed is about the worst economic forecaster you can imagine. They are academics. They never go to a local pub. They never go shopping – or they lie. But basically they are a bunch of people who never worked a single day in their lives. They’re not businessmen that have to balance the books, earn some money by selling goods, and pay the expenditures. They get paid by the government. And so these people have no clue about the economy.

And, so what happens is they never paid any attention to excessive credit growth – and let me remind you, between 2000 and 2007, credit growth was five times the growth of the economy in nominal terms. In other words, in order to create one dollar of GDP, you had to borrow another five dollars from the credit market. Now this came to an end in 2008.

Now the Fed never having paid any attention to credit growth, they realized if we have a credit-addicted economy and credit growth slows down, we have to print money. So that’s what they did. But believe me, it doesn’t take a rocket scientist to see that if you print money you don’t create prosperity. Otherwise, every country would be unbelievably rich, because every country would print money and be happy thereafter.

On the Unintended Consequences of Money Printing

In the short term, it has been working to some extent, in the sense that equity prices are up and interest rates are down. And, so companies can issue bonds at extremely low rates. But every money-printing exercise in the world leads to unintended consequences at a later point. And this is the important issue to remember. We don’t know yet for sure what the unintended consequences are.

We know one unintended consequence, and this is that the middle class and the lower classes of society, say 50% of the U.S., has rather been hurt by the increase in the quantity of money in the sense that commodity prices in particular food and energy have gone up very substantially. And, since below 50% of income recipients in the U.S. spend a lot, a much larger portion of their income on food and energy than, say, the 10% richest people in America and highest income earners, they have been hurt by monetary policy. In addition, the lower income groups, if they have savings, traditionally they keep them in safe deposits and in cash because they don’t have much money to invest in the first place. So the increase in the value of the S&P hasn’t helped them, but it helped the 5% or 10% or 1% of the population that owns equities. So it's created a wider wealth inequality, and that is a negative from a society point of view.

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Dr. Faber publishes a widely read monthly investment newsletter, The Gloom Boom & Doom Report, which highlights unusual investment opportunities, and is the author of several books including Tomorrow's Gold – Asia's Age of Discovery, which was first published in 2002 and highlights future investment opportunities around the world.  Tomorrow's Gold was on Amazon's best seller list for several weeks and is being translated into Japanese, Chinese, Korean, Thai, and German. Dr. Faber is also a regular contributor to several leading financial publications around the world.

Between 1970 and 1978, Dr. Faber worked for White Weld & Company Limited in New York, Zurich, and Hong Kong. Since 1973, he has lived in Hong Kong. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, MARC FABER LIMITED, which acts as an investment advisor and fund manager.

Our series of podcast interviews with notable minds includes:

 

This is a companion discussion topic for the original entry at https://peakprosperity.com/marc-faber-the-perils-of-money-printings-unintended-consequences-2/

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Hope he tells his Greenpan tale…

"Mark Faber, Hong-based investor and author of the monthly Gloom, Boom & Doom Report, could see far enough ahead to move to Asia in the 1970s.  He remembers his meetings with Alan Greenspan (when Faber still worked in New York): I was put in charge of research liaison for White, Weld’s overseas offices…My job entailed…attending the monthly economic presentations [by Alan Greenspan]…When Mr. Greenspan first came on board at White, Weld as a consultant, 30 or 40 people from the firm’s various departments would attend the meetings.  Within a few months, however, attendance had dropped to just a handful of White, Weld employees.  By then I had also learned that the easiest way for me to communicate the (to me) incomprehensible remarks of [Greenspan] to our overseas offices was smply to summarize the previous day’s news from the front page of the Wall Street Journal”.
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I am with Dmitri Orlov backed by Chaos theory. The down-slope is not smooth. The situation will flicker back to the old stability for a while and then Wham, back again to the new reality.
Each return to the previous reality will be shorter and less robust than the last until we stabilise in the new reality. Ennui will be the signature that we have arrived at last.

A way to test this idea is to identify self-similarity. Events at a finer scale that mimic the larger Chaotic flickering.

At the moment things look like the old reality. With less oil.

Those Folk and their Rognarok! A little poem for your amusement and pleasure Mr Faber.

The needle drills, is extended
Draws the substance from our bowels
Crack the fluid, make it potent
Find a vein, and inject it in.
Our logic’s certain, The Model trusted.
The Money, friend, is the only thing.
The model’s wrong, the poems all busted.
And this my friend is our last fling.

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How about another world war???

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Civil war???

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Faber lives life, is entertained by life in spite of all he sees. I gravitate (again) to these type folks. Very important Podcast Chris. Tigers start in 15 minutes (radio and 70 degrees in Michigan during March!!! Love it!).
BOB

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 Debt hawks forever fret about inflation. Their typical logic is:  "If the government prints too much money, there will be too many dollars chasing too few goods, and that is inflation."
Wrong on several counts.  First, the U.S. federal government does not "print" money.  Those greenbacks in your wallet are not dollars.  They are titles to dollars, similar to the titles on your house and your car.  Dollars do not exist in any physical form.  They strictly are numbers in balance sheets, having no more substance than the number 6.

Second, the government creates dollars by paying bills.  You and I first must have a source of dollars with which to pay our bills.  We are monetarily non-sovereign. By contrast, the U.S. government is Monetarily Sovereign

The U.S. government became Monetarily Sovereign on August 15, 1971.  Here’s how it pays bills and creates dollars:  It sends instructions (not dollars) to creditors’ banks, telling those banks to increase the numbers in the creditors’ checking account. Those increases in numbers are what create dollars.  The federal government can send instructions endlessly, without taxes or borrowing.

Third, inflation is a general rise in prices, not just a rise in the price of a few items.  In this new, world economy, there no longer can be "too few goods."  Since the U.S. became Monetarily Sovereign, there has been zero relationship between federal money creation and inflation. 

Most people find this surprising, but the reason is clear: If one supplying nation runs short of a product or service, a dozen other nations are ready to step in. I live in Chicago. During the winter, we obtain fresh fruit from Chili and seafood from Australia.  That was not always the case.  The world has changed. No longer can too many dollars chase too few goods – with just one exception:  Oil.

Oil is the one product that influences the prices of all other products and services.  Oil price increases are the cause of inflation – not too many dollars and not too few goods.

The author also said, " . . . if you print money you don’t create prosperity. Otherwise, every country would be unbelievably rich, because every country would print money and be happy thereafter."

Three reasons why this is wrong:

First, not all nations have the unlimited ability to pay bills and thereby create dollars. The euro nations, for instance, are monetarily non-sovereign, which is why they are suffering for lack of euros.

Second, the Monetarily Sovereign nations seem to have the "Tea Party Syndrome," in which they do not recognize their own Monetary Sovereignty.  They think their governments need to tax and borrow, and government debt is a burden on taxpayers.  They are wrong on all counts, which I would be glad to explain, but not in the narrow confines of this blog.

Third, there is a strong relationship between federal money creation and economic growth.

In short, the author of this post does not understand the differences between Monetary Sovereignty and monetary non-sovereignty.  Because Monetary Sovereignty is the basis for all economics, those who don’t understand it, don’t understand economics.

Rodger Malcolm Mitchell

www.nofica.com

 

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You may get fruit from many countries but what about the cost of bringing from port and storing it and displaying it.   Chicago is full of nonsense too. 

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First, welcome to the blog.
Second, I suggest you take the Crash Course, particularly chapters 6-12.  You have a few misconceptions of what money is and how its created.  I’ll just mention the first and most obvious.  The gov’t doesn’t create money, the Federal Reserve (and other banks) do, and they loan it into existence.

Happy listening.

Doug

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 When I came back to CM I promised myself I’d limit the use of the word moron.
After reading that "post" I’m going to go out and garden, since the garden is at least a football field’s lenght from the m key on my keyboard.

[Moderator’s note:  This post is a violation of the forum guidelines. Personal attacks and name calling are not allowed.  Appropriate corrective action with the user has been undertaken.]

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What a coincidence.  We spent part of the day at a local nursery and came home and planted a bunch of fruit and nut trees and bushes.  I can’t believe its the middle of March and its 70 and sunny.
Doug

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Gents:
The bees are flying!!!  I saw a fruit tree in bloom this morning!!!  That’s one full month ahead of last year.  Maybe a bumper crop of honey?  … dons

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I assume you did not look at the data  references I supplied.  As for the cost of bringing from port and storing it and displaying it – So??? There are transportation costs, storage costs and display costs from California, too – not to mention lower foreign labor costs.  But, what’s your point?And as for your comment that Chicago being full of nonsense, you have just reminded my why I so seldom visit this site. The frequent combination of insults plus lack of data and informed comment, make this blog essentially a time-waster.  
There are several good, informative economics sites, in which people not only understand economics, but discuss actual data.  In addition to my site at www.nofica.com, I suggest moslereconomics.com/ and www.nakedcapitalism.com/.
All are far more informative.
Rodger Malcolm Mitchell.
 

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 You are correct that banks create dollars by lending. That is incorrectly termed "fractional reserve" lending (It actually is "fractional capital" lending.) You too, create dollars by lending, if you obtain a legal note in exchange for your dollars.The federal govenment creates dollars by paying bills.  For instance, if you receive Social Security benefits, the Treasury will wire instructions to your bank to increase the numbers in your checking account.  When the numbers in your checking account are increased, dollars come into existence. All dollars merely are numbers.
Because the dollars are created by your bank, at the instruction of the Treasury, one can have endless and useless debates about whether it was the government or your bank (which probably is part of the Federal Reserve System), that actually created the money.  I opt for the government, because Congress ordered it and the Treasury instructed in.  Your bank was just a conduit, doing as it was told.
Notice that the Treasury did not sent dollars to your bank.  It sent instructions – an important point.  The federal govenment, being Monetarily Sovereign, has the unlimited ability to send instructions, without collecting taxes or borrowing or having any other source of income.
You and I, the states, counties and cities, and the euro nations, being monetarily non-sovereign, do not have this ability. To understand economics, one must understand the differences between Monetary Sovereignty and monetary non-sovereignty.
Rodger Malcolm Mitchell.
 
 

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It is beautiful.  Feels great to be away from the soapstone stove and digging dirt!
Roger: You should bundle what you write, I’d buy it in place of the horse $hit I usually get for the garden —it would grow tomatoes Garrison Keillor would be envious of.

The dollar has lost 86% of its value since 1966. 

The dollar---by BLS admission---has lost 96% of its value since the Federal Reserve Act of 1913.

You can try to obfuscate that all you want, though you’ll probably have better luck on a blog high in moron content, of which CM’s lacks. 

[Moderator's note:  This post is a violation of the forum guidelines. Personal attacks and name calling are not allowed.  Appropriate corrective action with the user has been undertaken.]
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 [quote] You are correct that banks create dollars by lending. That is incorrectly termed "fractional reserve" lending (It actually is "fractional capital" lending.) You too, create dollars by lending, if you obtain a legal note in exchange for your dollars.[/quote]
That is incorrect.  When I loan money to someone, it comes out of my pocket or checking account.  It is money that has already been created.

Again, incorrect.  When the fed. gov’t. spends money, it is money that they have already either raised in taxes or borrowed from someone.  That’s why they have a kerfuffle everytime they hit the debt ceiling.  They don’t have the money in their accounts to pay out if they can’t borrow it.  They don’t create it.

It is true that something like 97% of US dollars are merely digital entries, but money transferred into my bank account by the US gov’t. is on its books and was either borrowed or raised in taxes.  When a bank loans me money, they create it out of thin air.  When the Fed loans money they create it out of thin air.  if it’s money that eventually passes to the treasury, it is loaned to a dealer bank (i.e., Fed buys treasuries) who in turn buys treasuries from the US Treasury (i.e., loans them money).  It is true that my bank is just a conduit, but they do not create that money.

Call it what you like, the money in digital form is transferred to your account.  The gov’t does not create money.  They do create treasuries which they then use to borrow money.

Monetary sovereignty is not a difficult concept and most people on this forum understand the concepts.  It’s just that Congress has transferred the money making power to the Fed.

I should be a little more circumspect.  If anyone thinks I’ve got it wrong, please let me know.

Doug

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…boring.
Hey, the weather is just great here in Michigan, just beautiful. My Mommy used to say, " non-sense is after all non-sense , so give it no more time than it requires. So, respectfully, but your thread gets no more time.

Go Tigers

BOB

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(?) 
I’m thoroughly amazed to read something so un-E=mc2 on a blog like this.  This drivel is what you read when you pour over the FOMC minutes or read Turbo-Timmy’s bee-s.
Roger: The one thing I heart about your posts are your post #'s.
 
 

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[quote=robert essian]…boring.
Hey, the weather is just great here in Michigan, just beautiful. My Mommy used to say, " non-sense is after all non-sense , so give it no more time than it requires. So, respectfully, but your thread gets no more time.
Go Tigers
BOB
[/quote]
Completely off-topic, but that is my signature approach.
I lived in Detroit and the UP for a few years when I was a kid - Game 1 of the 68 World Series was the first baseball game I ever went to.  Too bad I was too young (6 years old) to appreciate Bob Gibson’s gem.
Was thrilled that the Tigers won and have been a Detroit fan since.  High hopes for this year…
That is all…

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 If the gooberment has the power of "Monetary Sovereign-ity" then why is there a "National Debt?" 
If they can  "will" digits into existence then why do they need to create "gooberment bonds?"

I know, I know, that was two questions. Not one…

C.