Thread: U.S. Inflation to Approach Zimbabwe Level, Faber Says (Update2)

I've met Marc Faber (aka Dr Doom) many times. Interesting bloke, interesting perspectives- and a guaranteed road to bankruptcy if you follow his investment recommendations aggressively.

^^ are you related to Bkkandrew ?

I called him on it a few minutes ago in another thread. Can't be a coincidence

^In your world, all posters are related to BKKandrew, as your paranoia increases you begin to feel that a TD conspiracy is upon you and hunting you down.

The reality though is that he was proved right and you wrong. The fact that numerous other posters now point this out is just a fact, not a conspiracy against you.

^ how laughable you are

no conspiracy for me, just noticing it, and do you even understand what drives inflation ? if we are in the middle of a recession how is inflation going to pickup if we are below Potential GDP, and Aggregate Demand is in shock ? please explain, that should be fun

if you want to have massive inflation when Aggregate Demand is in shock, you need to have a consecutive supply shock, and it only happens when production collapse because of successive rising costs of certain raw materials, for example Oil. If Oil was to rise again at 300 USD, then yes, we would have another supply shock, and a bigger recession, and short term inflation, but only temporarily. Any inflationary pressure that we had before with the supply shock (oil) is being reversed by decreasing Demand.

now again, bkka, explain us your vision in a non-blog non-sensationalist kind of way

I think there will be inflation, maybe hyper-inflation, but nothing like Zimbabwe.

Fabar, Schiff, and Rogers, and Roubini have been getting a lot of airplay.

They have to keep it fun.

We got shocko inflation already. Last week, mushrooms were C$1.99(Bt62)/lb; this week, they're "grown in BC" and cost C$2.99(Bt93)/lb. WTF? Gimme back my California shrooms.

The inflation bugs are wrong, and so I expect are the gold bugs. Here is a little Economics from Paul Krugman (Nobel prize winner) to explain why:-

Suddenly it seems as if everyone is talking about inflation. Stern opinion pieces warn that hyperinflation is just around the corner. And markets may be heeding these warnings: Interest rates on long-term government bonds are up, with fear of future inflation one possible reason for the interest-rate spike.
But does the big inflation scare make any sense? Basically, no — with one caveat I’ll get to later. And I suspect that the scare is at least partly about politics rather than economics.

First things first. It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.

So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.

The first story is just wrong. The second could be right, but isn’t.

Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.

Still, don’t such actions have to be inflationary sooner or later? No. The Bank of Japan, faced with economic difficulties not too different from those we face today, purchased debt on a huge scale between 1997 and 2003. What happened to consumer prices? They fell.

All in all, much of the current inflation discussion calls to mind what happened during the early years of the Great Depression when many influential people were warning about inflation even as prices plunged. As the British economist Ralph Hawtrey wrote, “Fantastic fears of inflation were expressed. That was to cry, Fire, Fire in Noah’s Flood.” And he went on, “It is after depression and unemployment have subsided that inflation becomes dangerous.”

http://www.nytimes.com/2009/05/29/op...n.html?_r=1&em

Note the last sentence. If and when inflationary pressures mount and need to be checked, it will be after the Bailouts have had their effect and been pronounced succesful. Which means you can look forward to another four years of Obama.

The current money printing by the Fed is not causing inflationary pressure at all, in fact prices are still dropping. Deflation remains a bigger current concern than inflation. These armchair guru's crying 'hyperinflation' display a woeful ignorance about basic economics. Then again, having done 20 years in the Investment biz, even they display a woeful ignorance of economics in most cases.

^If your quoted economist is correct there would be zero unemployment in Zimbabwe and Wiemar Germany would have also seen the same.

In both cases, the hyperinflation was actually preceded by a period of deflation, as it the current case in the US. Remember that for every two dollars spent by the Federal Government this year, one has been printed. If that is not a perfect guarantee of currency collapse and severe inflation, I would like to know what is.

^ Then buy gold. I wager you'll lose money.

^I did, at $778.

How much was the wager for?

Heh, I mean at current prices of course. We'll see- it may run up further ST, but I'm predicting bullion will be lower in 12 months.

Which is merely a reflection of my view that inflationary concerns are overdone, as per Krugman above. Faber jumping on the bandwagon adds a further statistical probability that I am correct, based on his track record.

^Interesting, so what do you think the outcome of the US monetising its debt will be?

Is there any example in history of a country printing over 50% of its current Government expenditure that has not resulted in severe inflation?

Lets differentiate between the basket cases and the USA here- the current money creation is a short term measure to counteract a fairly severe financial crisis. The money creation, whilst potentially alarming, is mainly being used to shore up the financial strength of Banks & other institutions- it is not translating to inflationary pressures via easy credit, leading to rampant consumption and speculation. (p.s- that was the story of the Bush administration)

The short term ramification, a weakening of the US dollar, is happening right now, is to be expected, and is basically good. There is a big difference between a weak USD however, and a currency collapse.

In the real economy, prices are still dropping- this is the opposite of inflation.

Originally Posted by sabang

Lets differentiate between the basket cases and the USA here

Zimbabwe was a regional economic powerhouse before Mugabe pursued mad policies.

Germany was an economic powerhouse before being saddled with unserviceable debt post WW1 and the adoption of mad policies in response.

The USA was an economic powerhouse prior to loading up with unsustainable debt and a mad policy response to the implosion of that debt.

Originally Posted by sabang

the current money creation is a short term measure to counteract a fairly severe financial crisis. The money creation, whilst potentially alarming, is mainly being used to shore up the financial strength of Banks & other institutions- it is not translating to inflationary pressures via easy credit, leading to rampant consumption and speculation. (p.s- that was the story of the Bush administration)

That was exactly the reasoning given by the Weimar regime and by Mugabe's muppets.

Originally Posted by sabang

The short term ramification, a weakening of the US dollar, is happening right now, is to be expected, and is basically good.

In the same way as the Zimbabwe dollar 'weakened'? Was that 'good' for them?

Originally Posted by sabang

There is a big difference between a weak USD however, and a currency collapse.

Try and say slowly that during 2009 every $2 spent by the Federal Government, $1 has come from income (taxes) and $1 by way of printing. Then think why this may not end well.

Originally Posted by sabang

In the real economy, prices are still dropping- this is the opposite of inflation.

BKKandrew posted the Weimar inflation chart some while ago. The hyperinflation was preceded by about 15-months of deflation. This is simply following the same pattern. Logically, of course, it will. The debt implosion creates deflation, the mega-money printing policy response causes the severe inflation.

The US can go on printing money and spending more than its earning just as long as they can keep borrowing from other countries to sustain it.
Zimbabwe would have got along just fine when they drove off their farming wealth production if the rest of the world just kept lending them money to import what they needed. But they got sanctions instead. Prices went up as shortages appeared. The government printed more money to offset rising prices, which did nothing at all to address the shortage of goods. The dog chasing its tail cycle of hyperinflation was set in motion.

USA is different from Zimbabwe in that it has a never ending supply of credit to support its own shortfalls in production, not the least because it controls the worlds money supply for trade through its hegemony.
And USA can supply its own domestic market with most of the things it needs when the credit dries up and the tradable value of the $US falls significantly.
But since a lot of the US manufacturing capacity has been shipped overseas during the boom times and prices are bound to go up as a weakened $US results in more expensive imported goods with a shortfall in competitive local supply.
It wont mean hyperinflation unless the government was to continue pumping paper money into the system like they did in Zimbabwe. But it will mean higher prices for just about everything, -- which is inflation.

The reason why we have deflation right now is because there is an oversupply of goods left over from the boom times. Retailers flogging things at cost before they go broke in a stagnant economy and overseas manufacturers still producing in the hope things will pick up soon.

Keeping things ticking over in their present mode by borrowing more and printing money is just prolonging the agony of an eventual crash. But it is something USA, unlike Zimbabwe, is in a unique position to do because of its control over the worlds default trading currency.

It seems there are plenty of financial experts around who predict that USA can simply keep borrowing and printing money into infinity with no consequences. Just as they thought house prises could go up at absurd rates infinitely.
Somewhere down the line the credit is going to stop and that will be the turning point where it all starts to fall apart. When more productive countries start seeing the purchase of US debt as a liability rather than an investment things will change rather dramatically.

As we know, a crash in the tradable value of the $US would be good for US manufacturing. It would enable domestic industry to compete with formerly cheap imports. Jobs would be created when the internal industrial infrastructure finally got rolling again. The trade imbalance would be a big winner as exports became cheaper and imports more expensive. But what about oil? The price of oil would have to escalate relative to the decline in the tradable value of the $US.
And of course any rise in the price of oil is inflationary as it affects the price of virtually everything.

The USA is headed for a big fall. Its people are going to be forced to take a big cut in living standards as the countries credit dries up and their dollar value falls.
Thats just another way of saying inflation, suddenly everything costs more and prices keep going up relative to wages.

USA should never need to see hyperinflation. But inflation is certain to happen eventually as the country gets back to living within its means.

Originally Posted by sabang

Lets differentiate between the basket cases and the USA here- the current money creation is a short term measure to counteract a fairly severe financial crisis. The money creation, whilst potentially alarming, is mainly being used to shore up the financial strength of Banks & other institutions- it is not translating to inflationary pressures via easy credit, leading to rampant consumption and speculation. (p.s- that was the story of the Bush administration)

The short term ramification, a weakening of the US dollar, is happening right now, is to be expected, and is basically good. There is a big difference between a weak USD however, and a currency collapse.

sabang is putting it nicely and better than anyone could.

Originally Posted by passengers

Germany was an economic powerhouse before being saddled with unserviceable debt post WW1 and the adoption of mad policies in response.

You can't compare the economic situation of Germany in the 20s and 30s with the situation today. You can't compare a complex modern economy with a simply archaic one of the early century. Why not go back to the middle age or even the stone age ?

Originally Posted by passengers

That was exactly the reasoning given by the Weimar regime and by Mugabe's muppets.

Nonsense, as usual. It's only recently that we understand the complex relationship between factor of productions, inflation, output etc... in the last 50 years there has been incredible progress in understanding the mechanics and how to solve things, which might explain why we were able to ride such a continuous growth, we were able to avoid many of the mistakes of the past (like 1920s Germany).

Originally Posted by passengers

In the same way as the Zimbabwe dollar 'weakened'? Was that 'good' for them?

Zimbabwe inflation is happening because they suffer a major supply shock, their GDP is shrinking, and their Potential GDP is decreasing at such a rapid pace that inflation is out of control. When the system of production is broken (seizure of land, no replacement for production), above all for an agricultural economy, GDP will collapse. As GDP collapse, inflation rise, it's a mechanical effect, and it's exactly what is happening. With inflation, the currency goes to nowhere, and because the velocity of money is so high (nobody wants to hold any currency), it puts more pressure on inflation and increase inflation. That's how you reach Hyperinflation.

Originally Posted by passengers

Try and say slowly that during 2009 every $2 spent by the Federal Government, $1 has come from income (taxes) and $1 by way of printing. Then think why this may not end well.

That's the Federal Deficit, not unusual, even for most European countries. The only effect is the crowding effect, which in turn will make interest rates higher eventually. Higher nominal rates when they are close to 0 means we are facing negative inflation as the real interest rates is usually stable. You can see this effect by the massive capital inflow into US treasury even when they are paying 0, which explain why China has been buying, because inflation is negative, real interest rates is actually positive. As strange as it sounds, it means you rate of return is the inflation when it becomes negative.

Originally Posted by passengers

BKKandrew posted the Weimar inflation chart some while ago. The hyperinflation was preceded by about 15-months of deflation. This is simply following the same pattern. Logically, of course, it will. The debt implosion creates deflation, the mega-money printing policy response causes the severe inflation.

See above, you are comparing apple and oranges. You are only looking at the consequences, not the cause. Inflation can happen under different circumstances. Likewise, back in the 20s, Germany wasn't equipped to fight inflation properly with the modern economic tools that we have now. Germany was basically powerless, and that's how it went out of control.

Originally Posted by Panda

It wont mean hyperinflation unless the government was to continue pumping paper money into the system like they did in Zimbabwe.

they weren't pumping anything, it's just the velocity of money that went to the roof, forcing the government to issue new notes for the rapid inflation. Inflation happened because their GDP was shrinking at an incredible pace. When it does, no solution will stop inflation. If you need a reason for the shrinking of their GDP (production), look no further than the illegal seizure of white farm lands by the militia and the unskilled farmers. They couldn't replace the production level, and that's when things started to go wrong. The rest just followed. It's not different than Mao or Stalin Communism when they seized all the means of production, from farmers to factories, and replace everyone with unskilled labor. Eventually, your economy collapse.

Originally Posted by Panda

But inflation is certain to happen eventually as the country gets back to living within its means.

Inflation is natural and acceptable when it's reasonable (less than 3%) and to be expected. It's actually an incentive for a strong rate of growth.

The U.S. suffers from social disorders, less economic ones. They reflect each other.

Originally Posted by Butterfly

See above, you are comparing apple and oranges. You are only looking at the consequences, not the cause. Inflation can happen under different circumstances. Likewise, back in the 20s, Germany wasn't equipped to fight inflation properly with the modern economic tools that we have now.

Yes, those same modern economic tools of today seem to have delivered the world into what is widely accepted as the worst financial collapse since the 1930s.

Bottom line is that despite all the fiddling round the edges by these modern financial geniuses, -- you spend more than you earn and you are going to go broke sooner or later.

Originally Posted by Rural Surin

The U.S. suffers from social disorders, less economic ones. They reflect each other.

Agree with you there. Its a bomb with a long slow wick waiting to go off when the big crash comes. When the baby boomers realize their slice of the pie has already been spent it could get even worse.

Originally Posted by sabang

I've met Marc Faber (aka Dr Doom) many times. Interesting bloke, interesting perspectives- and a guaranteed road to bankruptcy if you follow his investment recommendations aggressively.

I've been following Marc Faber's general advice since gold was under $300/oz and have had quite the opposite experience. He's a very good economic historian and looks at the big picture better than anyone with the possible exception of Nuriel Roubini. You are correct that one must be careful about some of Faber's specific recommendations, especially since they can involve Third World companies with very little transparency. For me, his most brilliant idea is that if you can identify long-term historical trends and can see emerging sectors, you really only need to spend one day of investing per decade to make money. For example: 1970 - buy a quality basket of commodities-based stocks, 1980 - sell your commodities stocks and buy a basket of Japanese equities, 1990 - sell your Japanese stocks and buy a basket of USA equities, 2000- sell your USA equities and buy commodities stocks again. Of course the trick is to see 10 years ahead. I just heard Faber on a radio interview and he's pretty hot on farmland. He's still a gold bug and his Novagold recommendation has doubled for me in just a few months. I'm still with Faber 100% on betting against the dollar and investing in more stable currencies.

Originally Posted by Butterfly

Originally Posted by passengers

Try and say slowly that during 2009 every $2 spent by the Federal Government, $1 has come from income (taxes) and $1 by way of printing. Then think why this may not end well.

That's the Federal Deficit, not unusual, even for most European countries. The only effect is the crowding effect, which in turn will make interest rates higher eventually. Higher nominal rates when they are close to 0 means we are facing negative inflation as the real interest rates is usually stable. You can see this effect by the massive capital inflow into US treasury even when they are paying 0, which explain why China has been buying, because inflation is negative, real interest rates is actually positive. As strange as it sounds, it means you rate of return is the inflation when it becomes negative.

Most of you post is mindless waffle. I will simply highlight this section to show you are completely clueless. You say that a situation of the US Federal Government (or, indeed, a European state) printing over 50% of the money they spend is "normal". Aside from Weimar Germany (where they did practice this), can you give any other examples of a European or North American Government printing over 50% of its expenditure?

Thick, blind to facts, bellicose and hectoring. Those are just your good points.

Some of Fabers long term calls have been fine- I remember he was an advocate of emerging markets. His individual stock picks- pretty mediocre as i recall, but i'm glad you are doing well on Novagold.

The reason he'd have sent many people bankrupt is because he has been unrelentingly bearish through some of the strongest bull markets in history! Hence 'Dr Doom'.

But he is well worth reading and listening too- if you have a mind of your own that is, otherwise he can be downright dangerous. Anyhow, I reckon he's well wrong on this latest call. A skillful speculator could probably make money on being Long on gold short term (momentum), but short further out (fundamentals). All money creation processes are not the same, and comparing the USA to the Weimar republic, Zim or Argentina may sell Press space, but will lose most people money if they act on it.

The bailout package is actually looking pretty encouraging, but it's too early to say that with much confidence- the Stock market has gotten ahead of itself methinks.

^^ The Treas & fed can shrink the money supply again when the time comes to sell assets back into the market- HK did this very succesfully in the late 90's.

It all depends on the economy- if it recovers, expect to see the financial sector complaining about how much money the government has made! If it collapses, long, long recession or depression. But that is looking less and less likely.