June 14, 2004 – A recent report crossed my desk by Dr. Marc Faber, editor of the Gloom Boom & Doom Report. I first met Marc nearly twenty years ago when I was in the Middle East, and I have always very much valued his big-picture vision of markets and economies around the world. So his recent letter was not a surprise – it contains the typical insight I routinely expect from Marc. I would like to summarize some key points presented in his letter.
Discussing recent monetary events and the succession of bubbles that have occurred in the last decade or so, Marc goes on to say that up to the NASDAQ bubble of 1999/2000: “Mr. Greenspan was only a ‘serial’ bubble blower. He managed to create bubbles, but only one at the time and in different asset classes, at different times and in different parts of the world. But this time around, we have to give him far more credit for his monetary achievements and nominate him for a Nobel Price in bubble creation. After all, he is the first central banker in the history of capitalism who has managed to not only create a credit bubble in the US, which has led to the entire mortgage refinancing scheme, excessive household borrowings, over-consumption, and a growing current account deficit, but he has also miraculously managed to create bubbles all over the world – in stocks and bonds of emerging economies, the currencies of Australia, New Zealand and South Africa, in housing, and lastly in Chinese capital spending, which is now growing by more than 40% per annum, as well as in commodity prices.”
Marc then provides the following chart of Japanese foreign exchange reserves to show how the growing US current account deficit has created a bubble in the foreign exchange reserves of Asian central banks.
This chart has all the appearances of a bubble. This surge in Japanese reserves looks a lot like a chart of the NASDAQ up to Q1 2000. A more disturbing comparison though is the similarity of this chart to the increase in the quantity of reichsmarks in Weimar Germany before the growth in that currency went parabolic, which occurred during the approximately 2-year long period of monetary debasement which ended in the reichsmarks total collapse.
Returning to Marc’s commentary he notes insightfully: “So, all Mr. Greenspan has created is a huge financial and asset bubble everywhere in the world, but no real improvement in the US economy.”
Then Marc brings us to the crux of the issue: “The problem, however, is that the US requires an increasing amount of credit growth in order to keep real estate and stock prices up and to make them move higher, which in turn supports the US consumer’s excessive consumption. But, at the same time, while asset prices in the US are soaring, output is not rising for the simple reason that the market has discounted this “evil” Fed induced con game… But what is now suddenly happening is that the investment community, through the market mechanism, is beginning to catch on to the fact that there is much more credit growth out there than productive capacity, and therefore prices have risen in some cases, such as for commodities, very rapidly.”
To put it more bluntly, which Marc neatly does, the investment community is increasingly realizing that “Greenspan’s game cannot end well.“
Putting my own interpretation on Marc’s conclusion, the US dollar will end badly, just like it ended badly for the reichsmark.