Marc Faber: inflation vs. deflation

Marc Faber, Editor and Publisher of “The Gloom, Boom & Doom Report’” talks about colossal amounts of debt and the possible outcome: Inflation vs. Deflation.

In regards to the colossal amounts of debt there are two major schools of thought: Inflationists and Deflationists. According to the first, all the money printing will lead to high levels of inflation, devaluing the currency and with it the debt will be inflated away. Deflationists would hold against, that, even if central banks wanted to, they ultimately cannot stop deflation. Where do you stand in that debate?

Well you know it is like in a bubble. The bears are right and the bulls are right but at different times. Every bubble will go up and then eventually the bubble will burst and then you know prices collapse. So during the bubble stage the bullish people are right and during the collapse the bears are right, but at different times. This is the same with deflation and inflation; I think both will be right, but at different times. I believe that most people have a misconception of what inflation is. In other words most people, they think of inflation as an increase in price of goods they go and buy in the shop over there and over there, at the butcher and at the baker and in the grocery store and so forth when in fact this is just one of the symptoms of inflation.

You can have inflation that manifests itself in sharply rising wages, this hasn’t taken place but if you look globally, say in China, wages have gone up substantially or you take Thailand, wages have gone up substantially. Or it can manifest itself in rising commodity prices. Well I mean commodity prices have been weak lately but the oil price is still close to 50 dollars a barrel and it was at 12 dollars a barrel in 1999 and gold is still around 1000 dollars and it was at 300 dollars and below in the 1990s, the low was at 255 dollars. You understand? A lot of things have been weak recently but they are still up substantially compared to the past.

Or you take bond prices, in other words bond prices go up when interest rates go down. Bond prices in the last hundred years have never been this high; in other words interest rates have never been this low on sovereign debts. Or you take equity prices, ok some markets are down, mostly the emerging markets whether it is Russia or Brazil or the Asian markets, they are down from the peak but they are still much higher than say ten or fifteen years ago. Or you take property prices, it depends which properties but most property prices, for example if you look around here in Switzerland, the prices are much much higher than they were fifteen, twenty years ago.

Even in some areas, they may have come down a bit but in luxury areas there are record prices. Or you take the Hamptons, or Mayfair in London, or Chelsea in London, Kensington and so forth, prices are very high compared to say twenty years ago. Or you take paintings, art… I mean when I grew up and I started to work in 1970 in New York, in New York at that time a Rothko painting was offered to me for 30,000 dollars. I didn’t buy it because I thought why would I pay 30,000 for something like this! Now a Roscoe is maybe ten, twenty, thirty million dollars and I have a Warhol, it is not a big painting but nevertheless I bought it for 300 dollars in the 1970s. You understand? Prices have gone up dramatically, so if someone says to me, well there is deflation, I tell him, well tell me in what? You know, Hong Kong property prices, Singapore property prices, even Bangkok, Jakarta and so forth, all have been grossly inflated.

Therefore I think we have to re-examine the definition of inflation whereby maybe we have some sectors of the economy that are deflating, like if we measure wages inflation adjusted, they are all going down in the western world because a) the consumer price inflation that the Federal Reserve and Europeans report has nothing to do with the cost of living increase, the cost of living increases and we have studies about this, in most American cities are rising at between 5 and 10% per annum and if you include insurance premiums, health care costs, education costs and so forth.

So these prices are going up strongly. Or taxes, indirect taxes like tunnel fees or bridge tolls and so forth, all that is going up much more than the CPI and this is where people have to pay for to actually go to work and live. This is then reflected, this kind of inflation is reflected in a diminishing purchasing power of people, that’s why retail sales are relatively poor in the US despite of the fact that we are six years into an economic expansion. I am always telling people, you know when I started to work I didn’t have to be smart because if I put my money on deposit with the banks or bought government bonds they were yielding 6%.

Then from 1970 to 1981 interest rates continuously went up, so the compounding impact was very high. Now if I am a young guy, say your age; then I want to put my money on deposit, I am being F*d essentially by the banks because they are not paying me anything. If I buy ten years US treasury notes I am getting a yield of less than 3%; 2.3% at the present time and it was below 2% six months ago. So how can I really save? How can I make money? I want to buy a house ok?

Then you have to pay a huge price and the mortgage rate may still be around 4% you understand? So it is still relatively high interest rates on mortgages and one of the reasons that new home sales are not particularly strong is that young people just don’t have the money to buy it because a) they are also burdened with student debts. So I mean these are all issues that are very complex.

My sense is that knowing the central banks, and knowing the way that they think, what will come up when they realise that the global economy is not healing but actually back into contraction under the influence of the neo-Keynesians like Krugman, they will say, you know what?

We haven’t done enough, we have to do much more, and then they will print again and that is why I think that eventually we could have high inflation rates and a renewed increase in commodity prices.

they will print again and that is why I think that eventually we could have high inflation rates and a renewed increase in commodity prices.

A major argument by deflationists is that ultimately social mood might change. So while in 2008 everybody applauded the Fed for having saved the system, next time around it could be different. All the extraordinary measures might become too controversial, and all of a sudden we could see defaults happening in earnest. Is that a real possibility?

Yes. I mean I have read a lot about inflationary periods in history which we have experienced from time to time, under John Law in France and then later during the French revolution and in Latin America. I also experienced periods of high inflation myself in the sense that during the very high inflationary period in Latin America in the 1980s I visited most Latin American countries because I was interested in the fact that when you have high inflation in a country, usually the currency tumbles and so although there is high inflation in local currency, in a strong currency unit, like in the 80s the dollar was strong, the price level actually went down very substantially so investment opportunities were fantastic.

You could buy buildings in Buenos Aires, the stock market in the late 1980s in Argentina… the whole stock market was worth 750 million US dollars, 750, less than a billion. So you could essentially have bought the whole of Argentina for less than a billion dollars!! What happens in these periods of high monetary inflation is it is highly beneficial for a few families and a few well to do people because they know how to move their money between local currency and foreign currency and they know how to accumulate assets.

The people that get hurt are the masses, the middle class, the lower classes because their wages go up much less than the cost of living increases. Then what usually follows is a kind of political change of wind and you have new governments coming in and sometimes you have revolutions and sometimes you have an entire new leadership.

We had hyper-inflation in Germany and by the way there is a very good book out about the economics of inflation during the Weimar period, but in each instance it led to a polarisation of wealth and this is precisely what is happening now. You have huge merger and acquisition activity and you have stock buy-backs and if you look at the wealth inequality it is not between 1% of the population and 99, it is between 0.01%, the Carl Icahns of this world and the big assets holders and then the masses that do not have assets so they don’t benefit from rising asset prices.

In my view, you know you look at Trump, Donald Trump is no genius or anything, and he is not a particularly honest person either because his investors that bought bonds that were issued by his companies, most of them lost money, but he touches on one point, and this is a great dissatisfaction of the American of the typical American with his government.

I can tell you also that here in Switzerland, 90% of the people, they think the government is no longer looking after the interests of the people but after their own interests. It is the same in Europe. I think this is a huge failure of democracy, that democracy instead of having been able to elect leaders that look after the interests of the people, they actually look after their own interests. I mean you look at the Clintons, the Bush families and so forth, do you think they care about the ordinary Americans? They don’t care, they care about themselves, it is a power game. They care about money that is for sure.

Interview conducted by Johannes Maierhofer and Peter Matay

Full Interview – The big picture with Marc Faber