INTERNATIONAL. Dr. Marc Faber the Swiss fund manager and Gloom Boom & Doom editor has been reacting to the announcement Thursday of a third round of quantitative easing by the Federal Reserve.
He sees the Fed's action as ludicrous, leading to higher asset prices benefiting the wealthy while the man on the street faces higher cost of living and more job losses. He likens big government to a cancer taking away people's freedom and says the US is facing a fiscal Grand Canyon with never ending deficits.
Speaking to CNBC's Worldwide Exchange today, Faber said: "This time it's not only QE3, it is unlimited QE going on forever," with the Fed buying mortgage- backed securities and continuing operation Twist.
What are the consequences of QE forever?
"Asset prices will go up and the money will flow to the Mayfair Economy," he said, defining the latter as an "economy of the rich people whose assets prices go up and whose net worth increases" without any trickle down benefit to the real economy.
What you have is a small economy that is booming and the majority of the economy is being damaged by QE, Faber explains.
If you have very expansionary monetary policies, you actually encourage the expansion of government, then the fiscal deficits, the transfer payments etc..."We're not facing a fiscal cliff, we're facing a Grand Canyon, with never ending deficits," he reckons.
As the U.S. government heads into its fourth year of trillion-dollar-plus budget deficits amid on-going Congressional wrangling about taxes, it is likely to hit a threatened “fiscal cliff” in the form of a US$16.4 trillion self-imposed borrowing limit later this year or in early 2013, potentially forcing it into default unless Congress agrees to raise the debt ceiling – a contentious issue in this presidential election year.
The Federal Reserve said Thursday it will expand its holdings of long-term securities with open-ended purchases of US$40 billion of mortgage debt a month, as it seeks to boost growth and reduce unemployment, and would likely hold the federal funds rate near zero “at least through mid-2015".
It will continue its program to swap US$667 billion of short-term debt with longer-term securities to lengthen the average maturity of its holdings, an action dubbed Operation Twist. The central bank will also continue reinvesting its portfolio of maturing housing debt into agency mortgage- backed securities.
Supply side vs. demand boost
"The whole mandate of the Fed to boost asset prices and then to create wealth is ludicrous, it doesn’t work that way," stressed Faber, adding that it may boost spending temporarily, but "the collapse thereafter is even larger".
"Any further quantitative easing from the Fed, in whatever form, will only make our next economic crash that much more serious," agrees Ron Paul in a statement issued last night.
If you want to have an expansionary monetary policy, I would go as far as sending each household a check for US$10 million free as a gift, and put this on the balance sheet of the Treasury and the Fed, said the Gloom Boom & Doom publisher.
It would boost consumption temporarily, reckons Faber but in the longer term "no country has become rich from consumption; it's capital spending that leads to riches."
"For all of its vaunted policy tools, the Fed now finds itself repeating the same basic action over and over in an attempt to prime the economy with more debt and credit," writes Ron Paul, adding that "this latest decision to provide more quantitative easing will only prolong our economic stagnation, corrupt market signals, and encourage even more misallocation and malinvestment of resources."
In the austerity versus growth pseudo debate, one is reminded that if money printing was a panacea, Zimbabwe ought to have been an economic powerhouse and if government spending was a miracle cure, then Greece ought to have been the most successful eurozone economy.
Who got us there?
Faber sees the Fed's monetary policies over the last 15 years as mainly responsible for the various asset bubbles (Nasdaq, real estate etc...) leading to the subprime crisis in 2007. "The money printers and the neo-Keynesians interventionists are responsible for the crisis, reckons Faber, and people should know this."
"Mr. Bernanke and Fed governors appear not to understand that our current economic malaise resulted directly because of the excessive credit the Fed already pumped into the system," adds Ron Paul.
What should Dr. Bernanke do?
Resign, says Faber. "If I was Bernanke, for sure I would resign after having messed up the US as badly as Mr. Greenspan and Mr. Bernanke have done over the last 15 years.
Faber reminded his CNBC hosts that Mr. Bernanke, before being Fed Chairman, was "one of the principle architects of ultra expansionary monetary policies, never paying attention to the credit growth that led to the housing bubble."
"If I had messed up this badly, I would for sure resign," he stressed.
How does it all end?
One day this [Fed monetary policy] is going to be a problem in terms of credit ratings, in terms of the Fed having to monetize at a time when it may not need to monetize - when inflation will pick up, - Faber warned.
We have an economic crisis in the Western word because governments in most countries represent now over 50% of the economy, he reckons.
He sees "this enlargement" as a "cancer that is spreading, taking away people's freedom" and bringing in more regulations. With more and more regulations they [governments] are harassing entrepreneurs who are not hiring.
Printing money leads to mergers & acquisitions (M&A) and each M&A leads to redundancies and people losing their jobs, Faber concludes.
Dr Bernanke's attempt to boost growth and reduce unemployment will end up, according to Dr. Faber, in a fiscal Grand Canyon with never ending deficits, the majority of the economy being damaged, the man in the street facing higher prices and losing his job.
Don't you love economics?
About Dr. Marc Faber
Dr. Marc Faber was born in Zurich, Switzerland. He went to school in Geneva and Zurich and finished high school with the Matura. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics. Between 1970 and 1978, Dr Faber worked for White Weld & Co in New York, Zurich and Hong Kong.
Since 1973, he has lived in Asia. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK). In June 1990, he set up his own business which acts as an investment advisor and fund manager.
In 2000 Faber decided to spend more time writing his newsletters as well as growing his advisory business. He moved back to his home in Chiang Mai, Thailand, maintaining only a small administrative office in Hong Kong.
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.
To view the video clips of the CNBC interview, please click on the following links: