Dr. Marc Faber ruminating on a rainy day in Nepal…


I have just spent a week in Nepal, following my own suggestion, which I made last year at Christmas, to visit a new place at least once a year. Nepal is one of the world’s most scenic countries – it is also one of the world’s poorest.

Entirely landlocked, Nepal is squeezed between India to the south, and Tibet (now China) to the north. Its GDP per capita is just US$240 – the third-lowest in Asia. The life expectancy of its population, 60 years, is among the lowest in the world (Botswana has the lowest at 36 years; Japan the highest at 81.5 years), and its literacy rate of just 42% is also one of the lowest in the world.

Nepal’s capital city of Kathmandu offers many unusual and impressive cultural sites, which suggest some wealth in earlier times. Kathmandu also has some charm and a pleasant atmosphere. Rapid population growth over the last 100 years became a burden, as a growing number of people had to be supported by the same quantity of land, which, in the absence of industry and commerce, simply impoverished the country. In addition, while certainly poor, Nepal’s population of 22 million distinguishes itself by having supplied the world with some of its toughest and most courageous warriors, who form the renowned Gurkha batallions of the British and Indian armies and guards, who are nowadays widely employed in the Middle East. (It is worthy of note that Nepal has never been colonized or conquered by any of its formidable neighbors.)

After spending a few days in Kathmandu, we flew to Pokhara, which is situated beneath the Annapurna and Dhaulagiri mountain chains and, in clement weather, offers sensational views of the mountains. Unfortunately, we were only able to admire them from postcards and photos, because it rained solidly for the four days we stayed in the town. The continuous rain provided me, however, with the opportunity to read about Nepal and its history and also to think about the global economy and the financial markets.

Nepal’s Economy: Mixed Feelings

While in Nepal, I had some very mixed feelings, altering between being depressed by the poverty of some of its farmers, who live in small and remote villages high in the mountains, without electricity or water supply in their homes (agriculture – predominantly rice and corn – makes up 40% of GDP, compared to 1.4% in the United States) and moments of high mood because of the friendly nature of the Nepalese, who seem to be quite content and happy even while being poor and conscious of the privileged lives most of us enjoy in the Western industrialized countries.

I also had some time to ponder on the future of Nepal and on a question I was recently asked by a reader, who wanted to know if the Asian stock markets would suffer should the U.S. stock market experience a serious correction or a crash in the next few months. This question prompted me to look at some very simple economic, financial, and social statistics in Asia, and to compare them to the rest of the world. My conclusion? The long-term favorable potential of the Asian region may remain intact even if the Western economies were to weaken once again. In fact, a decoupling of the Asian stock markets from the performance of the U.S. is a distinct possibility.

Officially, the U.S. has a GDP of about US$11 trillion, while China’s GDP amounts to US$1.1 trillion and India’s to about US$500 billion. Moreover, whereas the world’s GDP stands at about US$32 trillion and the advanced economies have a combined GDP of US$25 trillion, the emerging Asian economies (including China and India, but excluding Hong Kong, Japan, Singapore, South Korea, and Taiwan – countries that are classified as advanced economies) have a GDP of just US$2.2 trillion. However, if we look at some production figures, it becomes obvious that the U.S. economy is nowhere near ten times as large as the Chinese economy, or more than 20 times the size of India’s GDP. Neither do the G7 countries have a GDP ten times larger than the emerging Asian countries.

According to The Economist’s World in Figures 2003 directory, China ranks as the world’s largest producer of cereals, meat, fruits, vegetables, rice, zinc, tin, and cotton. It is the world’s second-largest producer of wheat, coarse grains, tea, lead, raw wool, major oil seeds, and coal, the world third-largest producer of aluminum and energy, and ranks between fourth and sixth in the production of sugar, copper, precious metals, and rubber. India ranks among the top three producers of cereals, fruits, vegetables, wheat, rice, sugar, tea, and cotton. Indonesia ranks among the top four producers of rice, coffee, cocoa, copper, tin, and rubber; while Thailand is the world’s largest producer of rubber, and Vietnam the world’s second-largest producer of coffee.

“So what?” some readers may think, since these are just commodities…and thus are ‘irrelevant’ in post- industrialized societies!

Mixed Feelings: Textile Manfacturing

However, if we consider that China is already the world’s largest manufacturer of textiles, garments, footwear, steel, refrigerators, TVs, radios, toys, office products, and motorcycles, just to mention a few product lines, and if we then add the industrial production of Japan, Taiwan, South Korea, and India, we get a totally different picture of the size of the Asian economies than is suggested by statistics.

Why? Nominal GDP figures don’t take into account the difference in the price level between different countries.

In fact, statisticians, in order to account for the fact that in some countries the price level is far lower than in the Western industrialized countries, have calculated the GDP level based on purchasing power parities (PPP). And while I have some doubts about the methodology of PPP- adjusted GDP figures, it is nevertheless interesting to see how large the emerging economies are when based on this measurement: Asia – including China, Japan, India, South Korea, Indonesia, Taiwan, Thailand, the Philippines, Pakistan, Bangladesh, Malaysia, Hong Kong, and Vietnam – has a PPP-adjusted GDP of US$14 trillion, which is 50% larger than the U.S.’s PPP-adjusted GDP of US$9.6 trillion.

In fact, by this measurement, Asia, in which we should probably also include Central Asia, Australia and New Zealand, as well as parts of Far East Russia, would be by far the world’s largest economic bloc. Just taking manufacturing output into account would show that the combined outputs of Japan and China alone, not to mention those of South Korea, Taiwan, and India, would exceed that of the U.S..

“So what?” the skeptics will say again. “Europe and the U.S. have a thriving service sector, which is far more important than the manufacturing sector.” But the point about the service sector is that in Asia, with its low urbanization rate, many services never enter the GDP statistics. In Nepal, I took some interest in the economy of a remote mountain village of around 25 houses. I saw that most services in this small community never involved any cash transaction and, therefore, could not have an impact on GDP. Although land is individually owned, villagers harvest their small rice fields together. When a new house is built, everyone helps with the construction. Or, when a house changes ownership, which is most infrequent and usually only happens when people get married or pass away, no real estate agents, legal documents, cleaning services, and other real estate- related services are required.

Nepal’s Economy: Lifting the GDP

In a developed country, each time an existing home is sold, it boosts the service sector’s component of GDP, as commissions and fees change hands.

Now, it ought to be obvious that if existing home sales in the U.S. increased overnight by, say, ten times and people bought and sold homes at the pace they traded stocks online a few years ago, then GDP would be boosted significantly as a result of a rise in real estate transaction-related service income. But what would have been added to the wealth of the nation?

In poorly developed Nepal, most services in rural communities don’t involve any cash payment and therefore have no impact on GDP figures; whereas in our mature, developed, and highly differentiated economies, such services tend to lift the GDP figure. I should like to stress that one should not underestimate the importance of a well-developed service sector – health care, financial institutions, distribution, retailing, etc – in maximizing the potential of an economy, but in our developed and industrialized countries, the service sector may somewhat overstate GDP. By contrast, in emerging economies, the underdeveloped service sector may understate the size of the economy.

Just think of it this way: I am a very poor GDP booster, since when I travel I never eat breakfast, I clean my own shoes, do my own laundry and shave myself, and I don’t use all the available towels in my bathroom and, for ecological reasons, don’t change them daily. And since I have few hairs left on my head, I hardly ever require the services of a barber. Compare this with a fellow traveler who daily employs the services of a shoeshine boy, a laundry, and a barber, eats five times and changes his towels twice and, instead of walking one block to an appointment, takes a taxi.

That such a person enlarges GDP and contributes statistically to economic growth ought to be clear, but what economic value has really been added?

Nepal’s Economy: Little Value Added

I admit that some economic value might have been added if the shoeshine boy, the laundry, etc, use their income from our fellow traveler to build a modern, well-functioning electric utility, which then improves the power system and eliminates power blackouts. But if the recipients of this income just turn around and use their income themselves to eat five times a day and to use the very same services from each other, then precious little value has been added to the system.

At Kathmandu airport on the way back from Nepal, I almost went berserk, since it took about an hour to clear immigration and security checks. I cursed poor countries like Nepal, which have an underemployment rate of at least 50% and more likely even higher, for not putting sufficient immigration officers and security personnel in place to ensure that foreign visitors, which are Nepal’s most important revenue source, can arrive and leave satisfied with their experience of the country and in good spirits.

But then I remembered that, when I arrived in Chicago in late July, it took me more than two-and-a-half hours, waiting in line in a packed and totally disorganized arrivals hall, to pass through immigration. When I complained to an immigration officer about this deplorable state of affairs, I was told that the immigration department was understaffed because of the State of Illinois employee cutbacks and that all the immigration officers who were on duty that day were already doing overtime work. But not to worry, as in many other businesses, these cutbacks will show up in higher productivity figures in U.S. economic statistics and boost the stock market.

But what about the consumer’s productivity, who is forced to wait in line for two hours? His productivity is, of course, conveniently never measured.

Warm regards,

Marc Faber,
for The Daily Reckoning

September 23, 2003

P.S. It would be my guess that we have, in Asia today, the largest economic bloc of any region…and that the current ongoing economic expansion may already have replaced the United States as the engine of real growth for the global economy.

Asia is a large producer of resources, but it still requires the import of an increasing quantity of industrial commodities, including copper, cotton, crude oil, iron ore and food. In my opinion, the Asian block is largely responsible for the strength in commodity prices we have seen over the last two years and which is likely to continue for the foreseeable future – particularly if economic growth is now picking up in the industrialized countries, including Japan, as most experts currently seem to suggest.

Dr. Marc Faber is the editor of The Gloom, Boom and Doom Report and a contributor to Strategic Investment. Headquartered in Hong Kong for the past 20 years, Dr. Faber has specialized in Asian markets and advised major clients seeking down-and-out bargains with deep hidden value.

Looking ahead to where the real growth opportunities of the next 30 years lie, Dr. Faber has distilled his analyses into the ground-breaking book, “Tomorrow’s Gold” – a wake-up call to Western investors.

When does forever end, dear reader?

Yesterday, we said ‘the dollar will fall’…and it did fall.

“Yen soars after G7” was how Reuters described the event. An “Asian Awakening” was the phrase used by the Financial Times.

But even here in Europe, people seem to be rubbing their eyes and shaking off summer’s sleep. The euro rose too, ending the dollar’s rally.

What will happen next?

“An orderly depreciation of the dollar,” is what the world hopes for. A lower dollar would help ease America’s debt burden…it would lower the current account deficit…it would give American manufacturers a little boost in global commerce. But hoping for something doesn’t make it happen.

“History tells us that the U.S. dollar has only just begun its downward descent,” explains Stephen Roach. “On a broad trade-weighted basis, the dollar (in real terms) has fallen about 8% from its early 2001 highs. In a full-blown current account adjustment, a drop of around three times that magnitude can be expected – not all that different from the 30% real depreciation of the dollar that occurred in the late 1980s when the current-account disequilibrium was far less acute. In the end, a lopsided world has no choice other than to accede to a weaker dollar.”

We note that the last time the dollar began a serious decline was before Alan Greenspan became Fed chief and whilst the U.S. still had a positive net overseas credit position. Until the mid-’80s, more was owed to the people of the U.S. than was owed by them. Now, Americans are about $3 trillion indebted to the rest of the world and go deeper into debt by $1.7 billion every day.

But what did investors think? Did they think the world’s financial system could get further and further out of whack forever? Asia’s balance of trade with the U.S. is getting more and more lopsided…with China’s exports, for example, growing at almost 40% per year. Reserves of dollars in that part of the world are piling up. Already estimated at more than $1 trillion, they’re rising by 20% per year.

Meanwhile, as we laboriously illustrate in chapter 7 of Financial Reckoning Day, the dulcet voice of debt has seduced millions of Americans into ruining themselves. Since 1975, for example, personal bankruptcies are up 400%. Foreclosures have risen 350%.

But it was supposed to be eternal, wasn’t it? The Dollar Standard system – which allowed Americans to spend money they didn’t have – worked so well; people saw no reason it should ever end. Why else would consumers go deeper into debt…even with unemployment rising? Why else would they lend money to the U.S. government for 10 years and, after inflation, get almost nothing in interest? They must all think nothing can go wrong. Or why would they buy stocks at 50 times earnings unless they believe that everything must go right, forever? At a P/E of 50, we remind readers, an investor gets his money back in half a century, by which time the average investor has found eternity.

“The path that the Fed and the central banks of the world has put us on, is the path to bankruptcy, and I refer specifically to bankruptcy of the currency,” wrote Richard Russell yesterday. “You can’t run negative annual budgets of half a trillion and negative trade balances of half a trillion and still have a stable currency. It’s not possible. The way we are going has put the dollar on the path to either steady attrition or outright collapse.”

Things get out of whack from time to time. Often, they stay out of whack for so long people begin to think the trend is eternal. But things do not stay out of whack forever.

Otherwise, out of whack would be normal and normal would be out of whack. Eventually, one way or another, they tend to go back into whack.

We may not have come to the end of the world, dear reader, but at least we seem to be approaching the end of forever.

Over to Eric in New York…


Eric Fry reporting from Wall Street…

– The dollar stumbled again Monday morning, which knocked the legs out from under both the stock and bond markets. The Dow Jones Industrial Average dropped 109 points to 9,535 and the Nasdaq Composite fell 1.6% to 1,874. Treasurys also slumped, with the 10-year Treasury note’s yield climbing to 4.24% from 4.16% on Friday.

– Meanwhile, the ghoulish gold market delighted in the dollar’s misery by rallying $5.40 to a 7-year high of $388.30 an ounce…Gold bugs may wish to send thank-you notes to the G-7 ministers.

– The G-7 concluded its weekend confab in Dubai by issuing a communiqué calling for ‘flexibility’ in exchange rates. To the casual observer of global monetary affairs, ‘flexibility’ may seem like an innocuous term. But to the cognoscenti – and to currency traders worldwide – ‘flexibility’ means a freely floating Chinese yuan and a non-manipulated Japanese yen, both of which mean a lower U.S. dollar.

– “We emphasize,” the G-7’s communiqué declared, “that more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international financial system, based on market mechanisms.”

– Unfortunately, the announcement triggered anything but “smooth adjustments.” On Monday morning, dollar-holders trampled all over one another running for the exits. The greenback plunged 1.6% against the yen to 112.13, and slumped nearly 1% against the euro to $1.1472.

– The dollar’s selloff was not a complete shock, however. In the Daily Reckoning’s Weekend Edition, we remarked, “No amount of finger-wagging from officialdom will alter the dollar’s fate. On Monday, the dollar will be just as dangerous a currency to own as it is today. It will be no less reliable a store of value, and gold will be no less reliable a hedge against the dollar’s demise.” But even your dollar-bearish New York editor was surprised to see the G-7’s politely worded communiqué deliver such a savage beating to the U.S. currency.

– Ironically, the dollar’s decline comes at the urging of the same nation that prints it. And this irony is not lost on the world’s largest dollar holders. Already, many Asian central banks are exploring ways to lighten up on their U.S. dollar holdings.

– “The Chinese aren’t lapping up our treasury paper for its great investment attributes,” quips Stephanie Pomboy of MacroMavens, “but [rather] because of a mechanical need to maintain the Yuan/dollar peg…Given the formidable shortcomings of maintaining this peg, it is no wonder why there is a clear movement afoot across Asia to wean itself from its dollar dependence. The EMEAP (the Executives Meeting of East Asia and Pacific Central Banks) has launched an Asian bond fund to recycle Asian central bank dollar reserves into dollar-denominated Asian debt…

– “China’s suggestion that it is considering a peg to a basket of currencies is just another piece in its larger puzzle…one which will ultimately find Asia unleashing itself from its dollar tether. Of course, this will not happen overnight. But as Asia comes together to deflate the bubble we have foisted upon it, the sun will set on dollar hegemony…”

– Such a sunset would be particularly unpleasant for us Americans. Continuing dollar weakness could exert a disastrous influence over international capital flows. As it stands currently, America borrows hundreds of billions of dollars from foreigners every year and racks up half-a- trillion-dollar trade deficits every year, without ever worrying about when, if ever, the rest of the world will tire of funding our Texas-sized capital requirements. But the Day of Reckoning may yet arrive, even if – like an Italian train – it does not show up exactly when it is expected.

– “This country is privileged to consume more of the world’s goods than it produces and to finance the deficit with dollars,” notes James Grant, editor of Grant’s Interest Rate Observer. “International finance can be a difficult subject, but there is nothing abstract in the piles of empty shipping containers rising at America’s deepwater ports or in the mounds of dollar-denominated securities accumulating in the monetary warehouses of foreign, mainly Asian, governments. The containers stack up in America because this country imports much more than it exports. The securities accumulate abroad because the supply of dollars is greater than the private demand for dollars.”

– This bizarre state of affairs is very handy for a consumption-heavy, debt-heavy, savings-lite country like the U.S.. “Lucky us!” we might say. But how much longer until our luck runs out? Given America’s massive debts and massive dependence upon foreign creditors, the range of appropriate responses could include anything from a simple, “Thank you,” to a more exotic “Arigato” or “Xie xie.”

– But instead of thanking the Japanese and Chinese for funding our deficits, our Congress says, “Raise tariffs!” and our Treasury secretary says, “Lower the dollar!” From their lips to the foreign exchange market’s ears…


Bill Bonner, back in Paris…

*** Guess which country has the fastest-growing economy in the G7? Japan! GDP grew 4% in the 3rd quarter in the land of the raw fish eaters. And now Bloomberg tells us that the Japanese – who are the world’s biggest holders of U.S. Treasury bonds – are losing interest in dollar assets. Oh là là… What if they decide they don’t need so many Treasuries, after all?

*** A dear reader comments on Mussolini:

“[John T. Flynn’s] ‘As We Go Marching’ is an undiscovered classic. Sadly, it is out of print. I see just a few copies for sale on the secondary market. The two copies in my local library have not been checked out more than three or four times in the past twenty years. I can only wonder how few college courses on U.S. history or government assign the book. What a loss to inquiring minds everywhere.

“Adding to John Flynn’s description of Il Duce, here is more on Mussolini. I think this is important to know, in understanding how he came to power post-WWI. Mussolini was a widely known Socialist journalist in the pre-WWI days. He ran his own publication that had a narrow but influential readership. He was an Italian irredentist with respect to the city of Trieste, and the Isonzo-Caporetto region, and strongly advocated Italy’s entry into the War to fight the Austrians.

“Soon after Mussolini’s war-wish came true, he applied to the Italian Army for enlistment. Due to his leftist leanings and political opposition to the incumbent political power, the Italian Army hierarchy refused his application and told him to await any call-up of his Reserve unit, ‘Class of 1884.’ Thus in the early days of the war, Mussolini endured the insults of his contemporaries (what is the Italian word for ‘chickenhawk’?), having advocated going to war but then keeping a civilian job in the rear. But the War was not quick or easy, contrary to the early handicapping. Mussolini got his wish when his unit was recalled about six months into the fighting.

“Because he was well educated, Mussolini wanted to be an officer. But the Army commanders had no need for Socialist officers. Mussolini was given the rank of Corporal. His Commanding Officer offered him a job as regimental clerk, but Mussolini replied, ‘I joined the Army to fight, not to type.’ He went to the front lines with his unit of fanti, mostly peasants from the south of Italy. Mussolini’s first encounter with the Austrians was as part of a bayonet charge, met by Austrian machine guns. The fight dissolved into an exchange of rifle sniping and hand grenade tosses. After several hours, Austrian sappers blew up the Italian trenches, killing over 30 of Mussolini’s comrades before his eyes.

“Isonzo was the location of the numerous battles of the Caporetto. Mussolini made a name for himself as a hero in Italy’s tragedy. Casualties were in the hundreds of thousands, including a few of my mother’s uncles. What Verdun was to Britain, Isonzo was to Italy – a generation broken on the hard rocks of the Alpine slopes…

“Are we pushed by history, or pulled by Destiny? Maybe both? The Battle of Isonzo was what it was. But had Mussolini died at Isonzo, what would have happened to Italy and the world? It is worth pondering, because in the U.S. expedition to the Middle East today, what might happen due to fortune and chance of even a single person? Osama bin Laden could rapidly become Osama bin Shot-In- The-Head by a Navy SEAL sniper. Game, Set, Match to the USA in that part of the world. Same thing with Saddam Hussein. One afternoon, a couple hundred Army Rangers surround a small house in the town of El Crapola. A few hours later, a helicopter delivers the corpse of Saddam to the Morgue in Baghdad. Spin that one, Governor Dean. G. W. Bush will take another victory lap around the aircraft carrier. China will buy more bonds. Wal-Mart will buy more stuff from China. And John Flynn’s books will still be on the shelves of libraries, waiting for their moment in the modern sun.

“But back to Mussolini…

“Mussolini’s efforts in this combat earned him a field nomination from his Commanding Officer to an Officer’s Training Program. About one week after reporting for training, Mussolini was summarily dismissed from the program at the order of the Commando Supremo of the Italian Army. As before, there was no room for Socialist rabble-rousers in the Army.

“Mussolini returned to the front lines at the rank of Sergeant. Not long thereafter, he was loading a mortar when one of the rounds detonated prematurely. Mussolini was severely wounded, suffering over 40 schrapnel wounds, a smashed shoulder and almost losing a leg. He was evacuated to the rear, where he almost died after several medical corpsmen refused to treat him because they viewed him as ‘the man who started this damn war.’ But he survived, was discharged, and returned to the rear as a war hero. Adding to his luster, Mussolini’s son (by his mistress) was killed in combat and awarded the ‘Gold Medal, Posthumous’ for bravery.

“During the course of the fighting with the Austrians in the Julian Alps, the Italian Commando Supremo determined a need for specially trained mountain assault troops. Units were raised to suit this purpose, called arditi (‘the daring ones’). These were men of a certain violent predisposition, screened from applicants for just that purpose and trained to be fearless. They had a unique uniform of brown mountaineer pantaloons, black shirt, fez hat and all carried a long trench knife.

“Tens of thousands of these fighters were fed into the Battles of the Caporetto, almost all who survived being utterly brutalized during the vicious combat.

“Post-war, these arditi became a social problem for Italy. Quickly mustered out at the conclusion of hostilities, they returned to a broken and bankrupt land, with no prospect for jobs. Former arditi rapidly formed bands and associations, and Mussolini quickly organized and capitalized on these fighters without portfolio. Mussolini appealed to their sense of betrayal, urging the arditi on with talk of how they had been ‘abandoned by their nation.’ These arditi became the political muscle for Mussolini, the backbone of his ascendency, his “black shirts” as we know them today. The arditi formed the nucleus of Mussolini’s rise to power, through whose efforts he captured the pre-existing institutions of the Italian government. With just a few minor changes to the pre-existing institutions, Mussolini was in a position to label his administration as a ‘Fascist’ form of government.

“I think that this level of detail is what John Flynn does not tell you, when he says that absent the War some other person might have come to power in Italy, and governed with a different form of ‘fascism.’ Absent the War, Mussolini would have remained a Socialist crank on the fringes of power.”

The Daily Reckoning