"Print, Print and Print"

[Ed. Note: The following is an extract from the October edition of Dr. Faber’s indispensable monthly newsletter, The Gloom, Boom and Doom Report.]

No matter what central bankers and the cheerleading, mostly useless academics who surround them pronounce in their self-created aura of infinite academic “delicacy and refinement”, under the auspices of the Fed they will do precisely one thing: print, print, and print. Sadly, as Mignon McLaughlin observed, “The know-nothings are, unfortunately, seldom the do-nothings.”

I should like to emphasize once again that the US Fed will continue to monetize massively on any sign of either further economic weakness or a more meaningful (10% or so) financial and property market decline.

In the world I described above, the increased supply of dollars will flow somewhere.

Recently, CNBC interviewed 81-year-old Bernie Marcus, one of the founding partners of Home Depot. (He was CEO between 1979 and 1997.) Marcus, who is a self-made man and completely level-headed and without arrogance of any sort, described how he and Arthur Blank (the other co- founder) struggled when they opened their first store in 1979, in Atlanta.

For example, at 10 pm on his 50th birthday, he said, he was still in the store, moving boxes around without air-conditioning, because they needed to save money. He then said that he doesn’t mix with “important people”, such as Jeff Immelt of GE, and smooth-talking bankers and academics; instead, he talks daily with small businessmen, which is what he was when he started his business. He then cited several examples of people who run small businesses and who had told him how difficult business conditions were. He suggested that, like the king in a fairytale, Mr. Obama should dress up at night like a pauper and go out and talk to business people. According to Marcus, King Obama would then realize how unpopular he is and how destructive his economic policies have been for small businesses. He also suggested that the academics at the Fed and in the administration should, for once in their lives, go out and work, instead of sitting in big glass office towers and having no clue about what is ailing the economy.

Marcus then emphasized that none of the small businessmen he talked to had any plans to hire staff, because they felt there was far too much uncertainty about what kinds of regulations and laws Congress and the administration would come up with next. All his business friends and customers had told him that Obamacare would be a complete disaster for them. (It imposes on small businesses enormous non-medical tax compliance. It will require them to mail IRS 1099 tax forms to every vendor from whom they make purchases of more than US$600 in a year, with duplicate forms going to the IRS. Obamacare will also fund 16,000 new IRS agents…) Asked what he would suggest as a solution, Marcus, who looks much younger than his age and is still very alert, responded that the US would be greatly helped if Congress went on a holiday for two years, as this would prevent the government from doing even more economic damage.

I have mentioned on previous occasions the critical views of other businessmen, such as Lee Iacocca (formerly of Chrysler) and Paul Otellini (CEO of Intel). Like Marcus, their view is that regulation is stifling capital spending and any employment gains in the US. But, whereas the “Otellinis” of this world are more in touch with large corporations, Marcus – whose philosophy is: “Whatever it takes” – is cultivating relationships with a vast number of ordinary people who run their privately owned businesses and have sales of from half a million to 100 million dollars.

Marcus was also very critical of the various financial bailouts (unlike the self-serving and hypocritical Charles Munger). But one point he made was particularly interesting. He said that the business people he talked to had access to credit; that banks were willing to lend them money! But they had no interest in borrowing funds given the current regulatory uncertainties. I should mention that Marcus is the antithesis of economic policy decision makers and academics who imagine themselves to be of infinite delicacy and refinement and suffer from “a narrowing of the mind” – not because they travel, but because they have never in their lives worked in a real business. But, obviously, he knows what he is talking about. (Home Depot now employs over 300,000 people.)

Now, does anyone really think that, under the conditions Marcus has described, the Fed’s increase in the quantity of money will flow into US employment and real wage gains? As Marcus likes to say, “You must be kidding!”

The money flows will continue to boost employment in emerging economies, along with their wages and asset prices.

The best way to visualize this process is to think of a huge money-printing machine in the US that produces an unlimited quantity of dollars. Most of these dollars flow to the corporate sector, financial institutions, and wealthy individuals. A large proportion of these dollars is then transferred to emerging economies through the US trade deficit and investment flows, and boosts economic activity and increases wealth in emerging economies relative to the US.

Some of these dollars then find their way back to the US and support Treasury bond prices. But since fewer dollars find their way back to the US than exit the country, the dollar has a weakening tendency against emerging market currencies and, especially, against hard assets whose supply is extremely limited compared to the money that the money machine keeps spitting out.


Dr. Marc Faber
for The Daily Reckoning

The Daily Reckoning