Dr Marc Faber: The Terminal Phase of a Credit and Asset Bubble

In the gilded ballroom of Hyatt’s Savoy ballroom, World War D‘s opening speaker Dr Mark Faber delivered a blunt message: the old world order is over.

The US reached a peak in prosperity and influence in the world in the 1950s or 1960s,’ said Faber. But since the 70s the superpower has been locked into a cycle of bubbles, busts and growing debt.

Debt, and the way it has manipulated the global economy, was the main theme of Faber’s address.

There are some people who claim to be economists who will tell you debts do not matter,’ Faber told the packed ballroom.

But the real story is different….

In other words, money printing creates more bubbles. Some assets go up, they overshoot, collapse and cause significant damage which necessitates, in the view of the US Federal Reserve, more money printing. It is a vicious cycle we’ve seen since the 70s: each time there was an economic problem, the Fed printed money and created more distortions.

He’s been a disaster,‘ Faber said drily. Faber pointed out that not only did Bernanke not notice the subprime disaster, he actually helped create it. ‘Under his tenure at the Federal Reserve and under his intellectual influence when working for Mr Greenspan they created the gigantic housing bubble,‘ he said.

At the heart of this expansion in debt, and cycle of bubbles and busts is the reliance of the US economy on consumption. For the last century, policy makers have encouraged consumption on all levels of society including government, and discouraged savings.

But according to Faber, consumption doesn’t create a strong economy. ‘Wealth doesn’t come from consumerism, it comes from capital spending,‘ he said.

And the problem for the US economy is that while debt has continued to rise, capital investment hasn’t. In fact, it’s been falling sharply for a long time.

If we have growing debts, there’s a difference in quality of those debts,‘ he said.  Japan, South Korea and Taiwan used their debts to invest in factories, plants…investments that generated wealth. According to Faber however, the US has just acquired debt to fuel consumption. ‘Where’s the future income?‘ he asked.

Faber used this as an opportunity to strike a note of caution for Australia, warning the room that one day Australia’s indebted housing sector won’t be able to borrow much more. It will then enter a period of contraction or very slow growth.

That was his warning to Australia: then came the opportunity.

We live in a new word. We live in a world where the balance of power has shifted to emerging countries,’ said Faber.

Full article: Dr Marc Faber: The Terminal Phase of a Credit and Asset Bubble (Money Morning)

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