The Global Economy: Gloom Boom or Doom? An Interview with Dr. Marc Faber

Welcome back to the DR Video Series. If you are tuning in for the first time, here’s the scoop on the newest addition to The Daily Reckoning. A few times a month, we’ll post interviews, video shorts and insights from today’s top minds. As a Daily Reckoning reader, you’ll have first crack at these exclusive videos – we’ll let you know each time a new one is posted.

In the latest DR Video Series interview, The Daily Reckoning’s Eric Fry talks with The Gloom, Boom & Doom Report’s Dr. Marc Faber about where he sees the biggest opportunities in the global economy. In addition, Dr. Faber explains his view on the inflation/deflation argument – and reminds us of the sneakiest form of inflation: taxation.

We hope you enjoy the video. Let us know what you think in the comments section below the transcript. Stay tuned for the second part of this exclusive interview with Dr. Marc Faber…coming soon!

Eric Fry: Hello, I’m Eric Fry. I’m here with Dr. Marc Faber, the editor of The Gloom, Boom & Doom Report. Which is it?

Marc Faber: Well, the world is in transition and you have some trends that are favorable and other trends that are no favorable. So I think it’s not a question to be ultra-bearish or ultra-bullish but to try to identify where there are opportunities. And I believe, in general, we live through very interesting times in the sense that the weight of the global economy is shifting to emerging economies.

And we’ll have volatility in emerging economies, but in general I think that as a percent of world’s GDP, you will find in 10-20 years time countries like India, China, Vietnam, Latin America, Africa, the Middle East, Russia, Central Asia will have a much larger weight and also a much larger say in the global economic affairs and political affairs. And that will lead to a lot of tension and volatilities in asset markets.

Eric Fry: Right. Well, that’s the boom part of the story. The gloom and the doom part, you’ve written a lot about deflation and inflation. Often those are simply academic arguments. In this environment, it feels as though the inflation/deflation argument is critical, and kind of a razor’s edge for determining the outcome of the various asset classes.

Marc Faber: Yes. That is correct. But if you really think through the deflation scenario then it would mean that the economy in the western world, notably in the US, is very weak.

So what happens if the economy is very weak under the Obama administration, the fiscal deficit goes up not down. The government tanks as a percent of economy expands. Monetary policies will have another huge easy move, or another extraordinary measure increasing the effects balance sheet. These are all factors that then lead eventually to more inflation.

Even if you have an environment where GDP per capita in real terms, inflation adjustment goes down. The government will of course lie about it. They will make it look good with all statistical adjustments they can use. The rate will go down as it has for the last ten years, but asset markets can go up very strongly.

Eric Fry: Well, you make the case that the government monetary policies will offset the deflationary effects in the western economies. How quickly do you think that will take place?

Marc Faber: Yes. And also I’d like to point out that in an economic system you can always have, in some sectors of the economy, deflation and then in the other sectors inflation. And we have now a global economy. I can assure you, you can go anywhere in the world – whether it’s Brazil, Africa, Asia, Central Asia, Russia.

The price level today is of course much higher than 20 years ago or ten years ago. So the US and western Europe, they may have on an international scale a bias towards maybe deflating a little bit, certainly. Real wages are deflating. But in emerging economies you have a lot of inflation. In some countries you have food prices going up annually at 20 percent per annum. And nobody can tell me that his energy bill is today lower than it was ten years ago.

Because the price of oil is much higher. It is up from ten dollars a barrel to say eighty dollars a barrel.

Eric Fry: Right. But right here in the US, many economists – and you know who they are – make the case for a long-term deflation or disinflation because private credit is contracting.

Marc Faber: Yes. I love one economist. He lives in New Jersey. His train fare has just gone up by almost 30 percent and he talks about deflation.

I can also send him a nice message that his tax bill will go up. So taxation is also a form of inflation. Because it’s not as simple as to say, “I’m going to tax you and you will pay the tax.” You can roll over these taxes onto other people, like retailers. They can roll it over to the consumer, and so forth and so on. This is the difficulty of fiscal policies. You don’t know right away who will end up paying the tax whenever you impose a tax.

Stay tuned for the second part of this exclusive interview with Marc Faber – coming soon!