Leading economist pessimistic on global financial recovery
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Australian Broadcasting Corporation

Broadcast: 26/08/2009

Reporter: Ali Moore

Dr Marc Faber, one of the world's best known economists, editor of the Gloom Boom and Doom report, and author of Tomorrow's Gold, joins Lateline Business to share his views on whether a global financial recovery is possible.


Transcript
ALI MOORE, PRESENTER: As markets continue their optimistic run, and the economic numbers are watched for signs of green shoots or yellow weeds, what does one of the world's best known bears make of where we are right now.

It's five months since we spoke to renowned economist Dr Marc Faber, editor of the Gloom, Boom and Doom Report and author of Tomorrow's Gold. Back then he lived up to his nickname Dr Doom, but since February has he become any more optimistic?

Marc Faber joins me in the studio.

Good evening and welcome.

MARC FABER, ECONOMIST: Thank you, my pleasure.

ALI MOORE: President Obama says the brakes have been put on America's economy. Just an hour ago, in fact, we got better-than-expected orders for manufactured goods. On the other side of the coin a lot of people are saying we're in for a second wave, whether it comes from commercial property in the US or banks in European. What do you think?

MARC FABER: We have to distinguish between the stock market and the real economy. The real economy began recession in late 2007 and then between September 2008 and March 2009 we fell off the cliff. And then we were at the very low level of economic activity. And then the huge stimulus packages kicked in and the money printing kick kicked. In other words zero interest rates and quantitative easing by the Federal Reserve and also other central banks.

That then stabilised the global economy and when you have car sales dropping 50 per cent and more, then you of course will have a rebound. But the question is how sustainable the rebound will be, or is this rebound at the present time borrowed from the future? My sense is that - and here I am talking about the economy - that the economy in the near term can recover and maybe the recovery will be somewhat lengthier than expected. The crack of boom because the first stimulus package in the US, probably will be followed by a second one, and money printing will lead to even more money printing next year, so it can last 12 to 18 months. And then we will get another set of problems arising from ... each government action has unintended consequences.

ALI MOORE: So let me just interrupt you there. So we're talking I guess two timelines. You have got economy recovering because of massive government stimulus. Within that next 12 to 18 month period do you see a risk of another sort of banking crisis if you like whether it's triggered by commercial property in the US? Do you see that as risk?

MARC FABER: Not a pronounced risk for the simple reason that, you know, I don't hold a very high opinion of bankers. But you really have to be dumb, dumb, dumb - not to make any money when the government gives you money free of charge. The bankers get money free of charge. I wished every person in Australia who has an honest business would get money free of charge and they would also make a lot of money. The bankers get a lot of money free of charge and they, the more market the Government in the US will throw at the system and the more bailouts will follow. You should buy bank stocks in the world. For the next, say, 12 months or so.

ALI MOORE: And then the next question is how that stimulus is wound back and whether or not governments can do it. Is that what you see as triggering the next crisis?

MARC FABER: I don't think they will wind it back voluntarily. I think one stimulus package will lead to the next one and to more money printing. So in five to 10 years time the real crisis will break out when the whole system collapses. That will be the end because the -

ALI MOORE: What do you mean by that?

MARC FABER: The system collapse occurs when at the moment we have the private sector failing basically and triggered partly by government policies and by Freddie Mac and Fannie Mae which were government-sponsored enterprises in the US. But the government was still in a position to bailout but the next time around the government will go bust, basically. And so before they go bust and fold, in other words don't pay the interest on their government debts because - don't misunderstand it - as the fiscal deficit goes up, the interest payments on the government they also go up. They're now around $400 billion annually. I think they will be around the trillion dollars in five to so seven years time and that will then become burdensome on the GDP.

And so then the government goes bust but before it does that it will try to inflate its way out. That won't work. So the next step will be to go to war. And the whole thing will collapse.

ALI MOORE: To the extent that they face an enormous issue, I think the estimate that came out yesterday of the American deficits over the next 10 years is over $9 trillion.

You have no faith in the administration's ability to wind back business and start dealing with the problem.

MARC FABER: Are you joking - having faith the US administration! I wonder who on earth would face the US administration, certainly not someone who thinks.

ALI MOORE: So therefore I take it that you are appalled they've reappointed Ben Bernanke?

MARC FABER: I think Ben Bernanke is like a ship captain. He has warning signs, he sails the ship, there's a storm coming. He disregards any warning signals, he disregards the storm signals. He sinks the ship, 1,000 passengers drown. He saves the crew in his control tower, five officers and himself in a lifeboat. They get a medal for saving five people. That's Wall Street. The rest of the country is basically bankrupt.

ALI MOORE: So you see this reappointment as reward.

MARC FABER: A total joke.

ALI MOORE: Who could have done a better job?

MARC FABER: Well, the problem is that whoever would have been appointed would have been an Obama puppet and so there is no better choice. Mr Faulkner would actually be a good choice but they took him as an adviser and pushed him aside because he has sound policies.

I can accept someone who comes to me and said Bernanke did a good job at, say, containing the crisis. OK, that we can discuss. But who created the crisis? Mr Greenspan and Mr Bernanke by letting credit growth get out of hand and that everybody could see.

ALI MOORE: Last time we spoke five months ago you said that I should buy a farm and a gun because things are going to get bad. I assume that's to be self-sufficient. So from what you're saying, though, we have around 12 to 18 months where you see there be some opportunities for room in the equity market and room in the economy and then we batten down the hatches because it's bad for a long time?

MARC FABER: Well I was lucky in the sense that I was interviewed in Canada on March 6, the day the S&P bottomed out. I would buy stocks because they were very oversold and because sentiment was very negative. Now we are somewhat overboard. We went from 666 on the S&P to over 1,000 and the Australian market went from 3,120 to now 4,154. So the markets, they had a huge move. But I think following maybe a sideways correction or so or even a more significant correction, the more significant the correction is the more money they will throw at the system. So stocks can go up. Actually the worse the economic conditions are the more stocks could go up.

ALI MOORE: Because the greater the bubble?

MARC FABER: Yes, but it will end badly.

ALI MOORE: Is there anything that you can tell me that could possibly derail your incredibly pessimistic scenario?

MARC FABER: No, but I have to say in Asia and in emerging economies in general we had a collapse in exports and in industrial production. But the domestic economy is relatively sound and, unlike what the conditions were before the Asian crisis in '97. We in Asia, we have large foreign exchange reserves. So in other words, the Asian countries are financially very strong and by the way also Australia. We have inflated property market in Australia. But as an economy, Australia is becoming more integrated into the Asian bloc. I have a relatively high opinion of the future prospects of Australia. I mean higher than, say, of the US. Plus, Australians are hard-working people.

ALI MOORE: Dr Marc Faber that's an excellent way to finish it, with a little bit of optimism. Thank you very much for joining us.

MARC FABER: It's my pleasure.