Marc Faber is one of the very successful investors on earth. He recently explained his view on the monetary policies of the developed regions in the world. Obviously he is no fan of the Keynesian way of thinking which is applied by the central banks in the developed regions.
The Keynesian policy considers easy money as a way out of economic recession and deflation. They argue that money creation smoothens out the business cycle. In his presentation, Marc Faber demonstrates that these kind of interventions achieve exactly the opposite: they make the business cycles much more violent, create extreme fluctuations in economic activity and result in far more financial volatility. In his opinion, the essential problem is that the Keynesian way of thinking tries to solve long term structural problems with short term fixes, with an emphasis to create bubbles to help the economy. However, Mr Faber notes that bubbles usually hurt the majority of market participants.
Based on the US Fed philosophy you can’t identify bubbles, but if they burst you can take measures to support asset prices by flooding the markets with liquidity (read: by “dropping dollar bills from an helicopter” in order to prevent deflation). In line with that way of thinking, the Fed has slashed interest rates and created liquidity over the last 30 years on a continuing basis.
Marc Faber believes that these policies have one big problem: central banks simply cannot determine what will happen with the money that is created. The key point is that inflation does not necessarily occur in wage inflation or in consumer prices. The additional liquidity however can create unpredictable sorts of inflations. For instance, it can result in a housing boom in country X, or in employment wage inflation in country Y, or in commodity price inflation in country Z. Furthermore, not every price increase will occur at the same rate, with the same intensity, at the same time. Those are the “unintended consequences” of money printing, which Marc Fabers discusses in detail with a lot of examples in his presentation.
“High monetary inflation brings distortions in the price mechanisms and volatility.” One of the examples Mr Faber used in his presentation is the Mexican deflation, in which the currency debased sharply against eg the US dollar between 1979 and 1983. From the lows in 1983 till its highs in 1988, the Mexican equity market in US dollar increase 44-fold! See slides 41 and 42.
Marc Faber his conclusion: money printing brings more and unpredictable volatility. We saw a major low in equities in March 2009 which we probably won’t see again because “every drop” comes with a new round of QE. Going forward, he believes that owning GOLD is a must for every individual and investor. Gold is not in a bubble as we haven’t seen rapid acceleration of prices (as an example, look back at 1979 where the gold price doubled in 3 months).
The video presentation is here, it’s really worth taking the time to listen to it or to study the following slides from the presentation.