Faber Peddling Gloom, Doom, Inflation, and Gold

May.27.09 | About: SPDR Gold (GLD)

Investment analyst and Gloom Boom Doom newsletter publisher Marc Faber has grabbed headlines again predicting that hyperinflation will impact the U.S. economy. According to Bloomberg, Faber stated:

“The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said.

Prices may increase at rates “close to” Zimbabwe’s gains, Faber said in an interview with Bloomberg Television in Hong Kong. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.

“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.””

There is no doubt that his prediction is extreme and one of the most sensational predictions we have come across. First off, it must be said, Mr. Faber cannot seriously believe that the situation in the U.S. will come to resemble Zimbabwe’s hyperinflation. Most economists predict that inflation will be essentially flat for 2009, with price inflation eventually rising to a rate slightly faster than the Fed’s 1.7 percent target inflation rate for the next few years. Faber projects that inflation will be 231 million percent worse, which smacks to us of hyperbole.

This appears to be an attempt to sensationalize legitimate concerns about future inflation driven by deficit spending for the purpose of grabbing headlines. If you can get past the ridiculous comparison to Zimbabwe, Faber actually has valid concerns. The amount of money being pumped into our financial system is unprecedented and there is real doubt thatClick to enlarge politicians in Washington will have the courage to brake a future run-away spending train. With the Fed holding rates at near zero for the foreseeable future (current Fed policy) and printing presses now monetizing the debt, the economy is being flooded with dollars. It is not hard to see that eventually the current policies coupled with economic growth will produce inflation.

As Milton Friedman and Anna Schwartz argued, “inflation is always and everywhere a monetary phenomenon.” According to monetarists like Friedman, monetary policy or the supply of money, must be able to adjust so as to the demand for money. Once economic growth returns, there will be pressure for policy makers to keep monetary policy loose and easy, but that condition left unchecked for too long can lead to hyper-inflation, even if not the kind that Faber speaks of. Countering inflation will eventually require both fiscal restraint to cut government spending and monetary tightening to wring the excess out of the system and both require a courage and inner-toughness most likely not found in modern politicians seeking reelection.

As ludicrous as Faber’s prediction may seem, it can be viewed as a warning. We may never face Zimbabwe’s inflation problems but we may well face some of our own, which would have grave consequences for the world economy. One other issue of note, Faber, a well known gold-bug, is no dummy and he knows that gold demand is being driven by investment dollars more than ever. If he can scare a few more dollars into gold, he stands to profit.

“Faber, who said he’s adding to his gold investments, advised buying the precious metal at the start of its eight-year rally, when it traded for less than $300 an ounce. The metal topped $1,000 last year and traded at $949.85 an ounce at 12:50 p.m. Hong Kong time. He also told investors to bail out of U.S. stocks a week before the so-called Black Monday crash in 1987, according to his Web site.”