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Marc Faber says QE2 will not work precisely because excessive monetary growth caused the crisis
Source: BI-ME , Author: BI-ME staff
Posted: Thu November 11, 2010 7:04 pm

INTERNATIONAL. Marc Faber the Swiss fund manager and Gloom Boom & Doom editor sees the Federal Reserve's monetary policies risking the creation of other asset bubbles similar to the ones that led to the financial system collapse.

He says it is important to understand the causes of the crisis, insinuating that you can't use the same tools to solve the crisis as the ones that caused it.

Speaking to CNBC on Tuesday, Faber attributed the cause of the crisis to excessive monetary growth.

"The cause of the crisis is excessive monetary growth leading to excessive debt growth, to the Nasdaq bubble, to the housing bubble that then led to overconsumption in the US and a symptom of over consumption in the country is always growth in trade deficit that then shifts production overseas because one trade deficit in one country is offset by trade surplus somewhere else. And to simplify matters lets say it was China," Faber said.

Asked if the global criticism of Mr Bernanke and the central bank following the announcement last week that the Fed will buy an additional US$600 billion of Treasuries through June,  in a bid to reduce unemployment and avert deflation, Faber said foreign leaders ought to be thanking the Fed for its weak-dollar policies.

"Actually, the US monetary policies have been very good for Asia, specifically for China because it fostered industrial production growth in China, employment growth, wage increases, domestic consumption, increased demand for raw materials, that then lifted commodity prices," he said

"For that actually the developing world, the emerging economies including China, India , Vietnam, Brazil and so forth should all send a thank you note to Bernanke, Faber added.

The Gloom Boom & Doom editor warned that the excess liquidity flows caused by a new round of quantitative easing will find their way into emerging economies and into precious metals leading to the build up of new bubbles that will burst and create the next crisis.

"The criticism arises because we have too much of a good thing, in other words the Fed's monetary policies now lead to some kind of bubbles in emerging economies through capital flows. These incoming liquidities, they can be absorbed in two ways - either let the currency appreciate sharply or you have domestic very high asset inflation or combination of the two," he told CNBC.

"Excess liquidity and dropping dollar bills on the United States from helicopters like Mr Ben Bernanke suggested - the problem with that is he doesn't know where the money will flow," he added.

"In this case, the excess liquidity flows into emerging economies and precious metals, and new bubbles are building up that at some point in the future will burst and then you have another problem on your hands the way you had the problem of the Nasdaq bubble burst and the housing bubble burst".

Writing in the November edition of The Gloom Boom & Doom report, Faber says the bull market in precious metals will continue as long as the US has negative real interest rates. In the short-run, the dollar could rally from very oversold levels and this would likely coincide with a market sell-off. Long term he remains as pessimistic as ever about the dollar.

Speaking to India's CNBC-TV18 today, Faber said: "Since the formation of the federal reserve, in 1913, the price of gold has gone up from US$25/oz to over US$1400/oz, In other words the value of a dollar bill has gone down by 97% in gold terms and it took more than a 100 years".

"Now the next time the value of the dollar declines by 97% won’t take a 100 years, I think it will happen in 10-15 years, " he said.

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