Faber’s Long-Term View

The following excerpts are from Gloom, Boom & Doom Report editor Marc Faber’s interview with India’s Economic Times:

The cause of the financial crisis was excessive credit growth and essentially the private sector has reacted rationally. After 2008, the private sector has reduced its leverage, in other words, the consumer credit is declining and business credit is also declining but this is being offset by a huge expansion of government credit. So total credit as a percent of the economy in the US is still growing. Now officially, the debt to GDP is 375%, it was 186% when the US went into depression after 1929. In other words, we start with a much higher debt level. In 1929 we did not have Social Security and we did not have Medicare and Medicaid, and if you add these unfunded liabilities of Medicare and Medicaid, and if you add Fannie Mae and Freddie Mac, which have been taken over by the government, we are talking about the debt to GDP of over 600%. In my opinion, in the long run, this is not sustainable. They will have to print money and the fiscal deficits will go up and the problem will be that one day when interest rates go up for whatever reason, maybe next year or in three years time, the interest payments on the government debt will balloon and in, say, seven years time, the interest payments on the US government debt will be between 35% to 50% of tax revenues, and then you are in a huge mess.

And so I believe that to get out of this mess, they will monetize and they will have all kind of stimulus packages and they will lead to high inflation, and the standards of living of the typical household will go down and it will enrich a few people, the elite, essentially, on Wall Street. But then to distract the attention, the US will escalate its war efforts and then the whole thing will collapse.

The interests of the US and China are further apart than ever before because you have essentially a declining superpower the United States and you have a rising superpower China, and the current superpower the US will obviously try to contain the rise of China, and China will want to have more say in global affairs and you can see their expansion everywhere in Latin America, in the Middle East even in the Indian Ocean, in East Africa and so forth. So that will lead to tensions.

I think the world has to learn that the US is no longer as relevant as it was 20 years ago to the global economy. I mean the share of the US in the global economy has diminished very substantially. You have higher car sales in China than in the United States and, by the way, car sales today in emerging economies including Indian, Latin American, China and so forth are larger than in the G-16 countries. In other words, it is larger than in Western Europe to US and Japan combined so also oil consumption in emerging economies today is larger than in the developed countries. So, we are dealing with a totally new world. There has been a huge shift in the balance of economic power between the rich countries, the arrogant countries of the west, and the emerging economies that are coming up, and that also will lead to tensions, in my opinion; political and geopolitical tensions.

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