Faber Peddling Gloom, Doom, Inflation, and Gold

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 that 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.”

Original post

Comments

[huangjin:]

“inflation is always and everywhere a monetary phenomenon.”

This is like saying house fires are always and everywhere a chemical reaction. Bernanke, Geithner and Obama are arsonists trying to burn the U.S. economy down, even though it is under water. Eventually they'll discover magnesium or quicklime. Until then, bet on deflation.

May 27 04:58 PM

[BrunoT:]

Let's see how you did with this one:

1. completely misquoted the man in the column.
2. compared a short term forecast by the fed on inflation over the next few years with a prediction of eventual hyperinflation in which no time frame was given. I am sure you are going to die. Is that the same as saying you're going to die in 3 years? Think it's fair comparison?
3. You failed to back up your assertions with anything remotely resembling proof or a coherent argument except for quoting the fed's "target rate". And of course everyone knows the Fed never lies or is completely wrong! Does it occur to you that this mess was caused by the same federal reserve you're putting your faith in? Thankfully everyone knows that using terms like "ludicrous/extreme/sen... is considered a legitimate substitute for facts when you're making an argument.
4. You refer to a man giving an interview to legitimate news sources as "peddling" inflation. I'm guessing you wanted us to infer he's up to something nefarious with the use of that word, like he's peddling fake Rolex watches on a street corner. Meanwhile you're here trying to drum up clients by writing columns and prominently listing your Company's services. So, would you also refer to yourself as "peddling" something? Or do you give your research away for free? Nice try though.

Unfortunately, I gotta give this one a big FAIL! Try writing a well researched, fair piece differing with the guy. You might gain more credibility with that approach.

May 27 05:09 PM

[dcb:]

Regardless of his commentary, if I had actually bough things when he said to buy, my portfolio would be about double in the past 9 months.

He called bottom on emerging markets in november, december, called the bottom on s&P, and told people to buy gold in low 70's.

I have been listening to multiple pundits during the crisis, and he has been very good. Therefore, he has earned my respect.

Considering the track records of many paid professionals I have listened to. I think it is worth listening to him.

I listened to the bloomberg report, and that wasn't my take away.

May 27 05:22 PM

[yellowhoard:]

I like to buy things when no one else likes them.

Consequently, I was not buying gold in 1980. I did invest in gold in the late 90's.

I also like to sell things when everyone is in a panic to own them.

So, I'll be waiting for an article from you, in a year or two, extolling the absolute need for everyone to own gold. That'll be my sell trigger.

I'm guessing, right around DOW/gold equivilance.

May 27 05:33 PM

[Market Sniper:]

Where does one start? OK, How About This?..Hyper-inflations are CURRENCY events. Hyper-inflations arise out of the worst business conditions imaginable. There have been TWO such events in American history. The collapse of the Continental Dollar and the collapse of the Confederate Dollar. The first lead to the US Constitution, the second defeat in war. Now, if you believe there are not CONSEQUENCES for the reckless fiscal and monetary policies currently being implimented, then you have no understanding of history. It is filled with dozens of examples. This is a well trodden road we are on and it does NOT end in a good place at all.

May 27 05:55 PM

[Ockham Rese...:]

Please everyone take a deep breath. I did not watch the interview because I do not get that channel but I quoted directly from the Bloomberg article. If the Bloomberg article misquoted the Bloomberg television interview, then I would suggest you take it up with them.

Secondly, I very clearly stated that when you get past the hyperbole of Zimbabwe, Faber makes an interesting and valid point.

May 27 06:11 PM

[rhone:]

i believe you owe Mr. Faber an apology; and since *when* do we 'trust' what the FED is telling us? I, too, place this as 'fail'.

May 27 06:28 PM

[user396040:]

Faber makes some good calls. I do think that there is considerable inflation down the road, but I am not convinced that we are out of the deleveraging, flight to liquidity, deflation mess yet. Inflation - when it gets out of control - has destroyed many empires (including the Roman). We are roughly 70 years into a Great Experiment - can a democracy with a non-metallic currency exercise the discipline necessary to avoid hyperinflation. We are all part of the Experiment and we all have the responsibility not to constantly demand that the government increase services and reduce taxes. This is not something which will "happen to us"; it is something we will do to ourselves. It is avoidable but it will take responsible voters and responsible politicians to avoid it.

May 27 07:06 PM

[a5fung:]

Wow, what a poor article indeed.

First you misquote, then you go on to make the assumption that he's trying to "scare a few more dollars into gold", when in fact he's been saying for the past little while (few months) that there are better investments than gold at the moment. In fact, in the same interview a question from the viewer pointed out that Faber said gold was dead money for the next few months (when it was hovering around 850-900) and saying it may go down, yet it went up to 950.

One of the indispensable ingredient of hyperinflation is the loss of confidence in the currency, and economic recovery/growth is NOT a necessary condition for hyperinflation. In fact, many episodes of hyperinflation is during periods of depressed economic conditions. I'm not saying hyperinflation will or will not occur, is just that this article doesn't seem to explain how hyperinflation actually come about.

May 28 12:04 AM

[receipt:]

PLEASE stop using the U.S. Government's "official" inflation statistics to demonstrate low rates. By now, any serious commentator must be aware that President Bill Clinton "fixed" those numbers to understate real inflation rates by adjusting for "quality improvements".
Example, your new refrigerator doesn't "really" cost more because it now has a digital thermostat instead of an analog dial. Ridiculous!

If you're serious then at least double the "official" inflation statistics in your future commentaries, and while you're at it, ask yourself whether the government that lies to its retirees this way is worthy of any trust at all. Silly little children might think so, but anyone with the ability to reason for themselves understands it can't be trusted.

May 28 10:09 AM

[Francis Sch...:]

There is NO way one can compare Gold in 1981 to Gold today: 1981 it was still possible to increase interest rates. Today it would just break the back of the economy.
Having said this, Inflation is a monetary phenomenon and interest rates have no impact on it. We are to see hyperinflation whatever interest rates we have and it won't take years before we see it. Having said this, it is an open question whether the USA will see the same hyperinflation Zimbabwe had, but we would not dare to pretend such a think is impossible.

Inflation is a more than proportional growth of the money supply and it always 'results' in price inflation.

May 28 11:19 AM

[Lynn:]

I went back and reviewed the tape, Faber was asked if the US would experience hyperinflation as seen in Zimbabwe. He replied, "Not that high, but close to it."

May 28 04:52 PM