Marc Faber: The Inflation-Deflation Debate Heats Up

by | Aug 5, 2009 | Marc Faber | 14 comments

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    In his most recent Gloom Boom & Doom Report Dr. Marc Faber discusses different aspects of the inflation-deflation debate. In interviews over the last year Dr. Faber has warned that inflation will be the end-game, but rarely has he gone into detail on the deflationary aspects of the ecomomy. In his most recent report, he spends quite a bit of time analyzing the near-term potential for deflation and long-term hyperinflation.

    If deflationists are right (and they could be right in the near term, in my opinion), then the US government bonds and the dollar will rally, while stocks, commodities, real estate, and lower-quality corporate bonds will tank. But if I am very confident about making one predicition, it is that, if we have further deflation in the immediate future, there will be not one more, but many more stimulus packages and further massive monetisation. So, government debt-to-GDP could easily double within five years. Now, does anyone seriously think that the dollar and government bond prices wouldn’t at some point begin to reflect concerns about the financial condition of the US under these conditions?

    source: Marc Faber, Gloom Boom & Doom Report, August 2009, p. 10-11

    Dr. Faber points out that deflation is definitely a near-term concern, but as soon as a deflationary spiral occurs, he suggests the stimulus packages involving bailouts and monetization of debt will be rampant. Deflation’s time frame will be very limited:

    …if the deflationists are right, it will only be for a limited period of time — in my opinion, a maximum of one year but more likely much less…

    So, for those out there waiting for a massive correction / collapse in stocks and commodities, be ready to pull the trigger when it happens, because there won’t be too much time for the markets sitting at the bottom before another “rally” ensues.


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      1. Good assessment, Mac. I too read this report and came to the same conclusion.

      2. This is one of those ‘debates’ we’ve had at this blog for the last few months… I post info from several deflationists as well as inflationists, and a lot of the readers here, i think, came to a similar conclusion. It is just very hard for me to believe that the broader stock markets will continue moving up forever — there has to be a pull back. And I am guessing that any major pull back (or crash) in equities/commodities would be touted as a deflationary scenario. It seems to me that most contrarians (Denninger, Zero Hedge, Mish) are waiting for an inevitable crash. We can call it deflation, or just that, a price crash. In my opinion, if it happens, it will be accompanied by a stronger dollar this next time around (similar to 2008), which will make this very easy to call a deflation.

        But, as Dr. Faber, Howard Katz and Jim Rogers have said, eventually, we will see massive inflation… Again, something hard for me to visualize, as I have never experienced “hyper” inflation. Though I don’t understand the exact mechanics of credit destruction vs. quantitative easing, it does make sense that trillions of dollars cranked into the private and public sector will eventually lead to an oversupply of US Dollars. It seems to me that the only way we (the USA) will ever pay off debt to foreign lenders will have to be through massive devaluation of the US Dollar. I see no other way for this payment of debt to happen other than quantitative easing, or perhaps completely defaulting, as our national debt is nearing the $100 Trillion mark slowly but surely. Eventually, we either default and the whole system stops, or we pay everything off with dollars that are worth significantly less… I can’t imagine a scenario where foreign lenders will just keep giving us money forever. Eventually confidence will be lost in the USA’s ability to repay.

        This brings up an interesting consideration in regards to a hyper-inflationary environment and personal debt. If, for example,  someone owes $300,000 on a house wouldn’t it be that much easier to pay off during a hyperinflationary scenario? Of course, you would have to have income adjusted to the hyperinflation, but theoretically, one could pay off their debt much faster in a scenario like this. Mike (Mish) Shedlock once suggested that Peter Schiff should be recommending that his clients buy real estate if he thinks hyperinflation is coming. I wonder if that is a viable investment concept, or, if the government would step in to either freeze mortgage and debt payments or make some sort of mandated adjustment based on the CPI.

        I guess only time will tell.

        For now, I wait for “deflation” to hit and buy more gold/silver assets like Dr. Faber has suggested! So, even though I may not have income (except for the mega-bucks I pull down from this killer blog) perhaps I will be able to exchange a few shares of ABX for cash and payoff my mortgage!

        Bring on the deflation — I need another chance to buy commodity assets on the cheap.

      3. OK, Mac…as you know, I am admitted “economics newbie,” but that the hell?…

        I see valid arguments on both sides…and at this point think one might as well flip a coin, IMHO.

        I’ve heard several opinions that suggest that the Fed is trying to cause some serious inflation (and not  just like +3%…), for the very reason you mentioned, Mac.

        I am considerably underwater on my house – but if we see across the board inflation…seriously inflation (like me bringing home 2x salary)…I might accept it, and keep paying the mortgage – but it better happen really soon.  I think there are A LOT of people like who are itching to cancel those payments…just like me.

        The only thing I MIGHT be able to “add” to the discussion, which seems to be left out often, is that decreasing prices is NOT necessarily “proof” of deflation – at least in the classical sense. 

        You can print all the money you want…which (I think) technically causes “classical” inflation (more paper money = each dollar SHOULD be worth less)…BUT if everyone getting that money stuffs it in there mattresses, and doesn’t spend it, prices may not go up at all (at least for a while…).

        If fact, prices could keep falling simply because of supply/demand.

        On the other hand, if trillions of dollars of “wealth” evaporates (see late 2008, early 2009), one can argue that is technically deflationary, even if the Fed isn’t explicitly pulling money out of the economy (which I think leads to classical deflation, though I’m not sure how the Fed does that).

        …BUT if such an event is accompanied with severe swings in supply/demand, prices can still go up…as evidenced by trying to buy an AR-15 and .223 ammo late last year or earlier this year.

        (On a tangent –  the supply/demand of assault weapons has considerably balanced out over the last couple of months…as has that of ammo – though not quite as much.)

        As for my “hopes,” although serious inflation might be of benefit to me, I agree with Peter Schiff in that we NEED to see (more?)deflation.  My gut tells me that had the govt done nothing, we would have seen more of it, quickly drop into a serious recession, and bottomed out much more quickly…

        Which leads to the next question – Have we bottomed out yet?  I don’t think so. 

      4. More rambling thoughts to muck up Mac’s blog…and feel free to tear me apart, because I am having trouble understanding myself on this one:

        One other aspect that MIGHT be important is the state of the economy, especially housing, before the bubble burst…

        Deflationists (I think) are centering their arguments around the destruction of “wealth” and available credit.  That is, people saw much of their wealth in the stock market melt away over the lat year, and banks are now much less willing to lend – so there is now less “money” available to buy things…especially houses.  Therefore, less things are being bought – thus, sellers must lower their prices to get things sold.

        However, wouldn’t they then “have to” argue that the environment 3-5 years ago was an inflationary one?  That is, people had a lot of “wealth” in the market, and money was easy.  Thus, there was more money floating around…prices went up.

        That would make sense to me…BUT assuming the deflationists were correct in that regard, shouldn’t we have seen some pretty legit, across the board inflation earlier this decade?

        Yes, housing went up…and oil/energy went up…gold went up…but didn’t everything else see pretty standard price increases?

        …and what’s happening now?

        Yes, housing continues to tank…because people can’t get loans…AND because a house is clearly no longer a money printing machine (i.e., demand took a DIVE).

        …and of course the oil bubble burst…well, oil IS creeping back up.

        Gold?  Hmmm…it’s near its all-time high…even though the stock market is still c. 40% off it’s high…

        I might be missing something big, but it seems to me like the only thing that has taken a big dive and stayed down, it real estate (residential and commercial)…

        Like I said, it’s a coin flip, and we’ll see what happens as more and more people get booted from unemployment benefits…but I for one am not going to slam the door on the inflationists.

        In the words of Robert Plant, “Ramble on!…”

      5. I hear where  Blaine is coming from and agree with Peter Schiff’s take on the matter as well, however we need to listen to the full message, which is: paper money (currency) and money ON paper (home equity and our brokerage account statements) is phantom wealth – especially during bubbles. Unrealised capital gains are just that – UNREALISED, unless you were wise enough to sell everything when the dow was at 14k and your house when it was at its peak in 2006.  But hardly anyone did that, because we thought our investments would keep going up. Since Nixon took us off the gold standard, it is futile to try and measure your wealth in terms of dollars. STUFF is wealth. I haven’t just been buying gold and silver, I buy non-perishable food as well. That is true wealth. Go back to the medieval times – their wealth was measured in how many cows, acres of land, gold pieces they had, etc. If the dollar crashes and you are holding stuff you’re not really going to care. You have everything you need to survive. And if deflation happens, it will be temporary and will provide great opportunities to acquire even more true wealth with your dollars. But waiting for the right time to buy stuff is the wrong mindset to have. You must always think that the demise of the deollar is right around the corner. And if I am wrong I can always eat my food. If the deflationists are wrong, they are screwed. The one thing that currency was good for in the post WWI Weimar Republic was to burn so people could stay warm in the winter time, but I would rather not be forced to set fire to my life savings. I’d rather buy some firewood before everything collapses.  I myself define a deflationary economy as more than half of all goods going down in price at the same time. Housing has been in a deflation for almost 2 years now, but we had an oil bubble in the meantime, and now commodity prices as a whole have risen dramatically since March. That is not deflation. If (or when) the dollar crashes, my guess is that you will not have time to transfer it into stuff fast enough, because EVERYONE will be wanting to do the same thing at that time. Not to mention that the Fed is hell bent on preventing deflation, and they have the track record to prove that they are VERY good at that!

      6. AS – I think you made my point much more concisely by simply stating, “I myself define a deflationary economy as more than half of all goods going down in price at the same time.”
        That’s what i was getting at, I think.  Only certain things are continuing to fall in price…well, I guess the only thing I can think of is housing in fact…and that particular item was THE major inflationary item over the last decade…so the fact that it is continuing to fall, doesn’t mean a darn thing.

      7. Agreed. “Corrections” and “deflation” are 2 different things. Unfortunately, the Fed sees bubbles popping not as corrections but as financial catastrophes that no one saw coming (except for people like Schiff). The real problem is that they will attempt to reflate the housing bubble just like they tried with the dotcom bubble in 2000 by keeping interest rates low and printing money. And just like in 2000, it will have unintended consequences resulting in a bubble springing up somewhere else. But imagine the size of the next bubble with all of the trillions of dollars being printed right now! Never before in history have we seen what we are about to see in the next few years.

      8. Let me qualify that last statement: Never before in US history have we seen what we are about to see in the next few years. We have seen this plenty of times in the past (ie. Zimbabwe, Weimar Rep, etc)

      9. Dang, I go out to run errands for the day and you guys rocked the comments. Killer stuff!

        I am going to put up an informative piece from Harry Dent’s August 2009 Economic Forecast as soon as I can. Dent analyzes the  destruction of wealth/deleveraging vs. creation of money supply argument and makes a very strong case for a deflationary sprial.

        Many of the things the two of you discuss above are presented by Dent as well — so I am pretty confident you guys are right on track with this.

      10. You guys have inspired me to add the ‘User Discussion’ plugin now found on the right of the page. Your information and insights are just as valuable as the rest of the stuff on this site.

        Thanks for playin’.


      11. Sweet!  It’s like I’m on The Price is Right or something…

        Regarding AS’ comment about this next bubble…

        I THINK this is what Celente has been talking about.  He’s calling it the Bailout Bubble…but I don’t really understand what he means by it.

        Many of his comments seem to be warning of some sort of hyperinflation, but he never really clarifies it…or explains how exactly he thinks we’re going to get there  – one of the things that bother me about him (Don’t get me wrong, I’m listening to him – but I wish he would explain himself a bit more).

        Do either of you know what he talking about?

      12. Some random comments…

        The bailout bubble Celente is talking about is essentially this (I think)…

        When dealing with the bailout bubble, I think we need to be looking at the “Public confidence” wave Armstrong talks about… when confidence is lost in the public sector, then we are going to see treasuries collapse as yields go through the roof… IMO,  the only way yields will go through the roof is because confidence in the dollar has been lost, which means it is getting hammered I think – we can call it inflation or whatever, but globally, I think individuals and governments will be trying to unload their dollar holdings – selling like crazy, essentially, causing a collapse in the buying power of the dollar….

        It is then that we should see a price explosion in gold

        I think this is the bailout bubble Celente discusses….   Also, when looking at this particular bubble, since it is ‘public’, then we will see this “Obamageddon” effect Celente talks about – riots, tax protests, etc… as the dollar loses value, price of goods relative to it goes up… again, call it inflation or whatever… but it seems to me that we are looking at capital flight from the USA to somewhere else – probably Asia, or hell, capital flight into gold, in the event confidence is lost in global public sectors….

        Faber talks about an inverse correlation right now   stocks move up, bond yields move up… in 2008, when the crash happened it was opposite…

        But, in the future, we (the domestic and global mob..) may lose confidence in the US private sector as well as the public sector, in which case we may have a change in the correlation, where we actually have a depressed/deflated stock market, as well as collapsing treasuries… in this scenario I believe the  question will be “how stable is the US government here – can they pay off debts, can they recover?” – and this, again, is when I think gold goes to the moon.

        Anyway, just some thoughts..



      13. Yes, Celente also refers to it as “the bubble to end all bubbles”. Very disconcerting. The way I interpret it is that it will be more of a battle of the bulge type of last ditch effort by the Obama Admin to try and spend us back into prosperity. Everything will seem great for a while (kinda like now - the Dow is rallying, unemployment is beginning to slow, and people are starting to buy cars again, etc) then the bills for all this crap come due and we go back to the printing presses again to try and pay it off – as if we can do this forever. I think “Obamageddon” has more to do with the rest of the world’s reaction to our spending than our spending itself. The BRIC Nations will be the ones who determine how long we can keep this ponzi scheme going. Nuclear explosions require critical mass before taking place. Water requires a certain temperature to reach it’s boiling point. There will be a point where the rest of the world finally says “its time to dump the dollar” and all of this spending is only racing us toward that point – almost like they want it to happen. I’m not a conspiracy theorist. Sorry if I sound like one.

      14. You hit the nail on the head AS: “I think “Obamageddon” has more to do with the rest of the world’s reaction to our spending than our spending itself. ”

        How the rest of the world responds, in my opinion, a total loss of confidence in the USA, will lead to collapse here, as any private capital that is left is going to rush to the exits.

        Whether or not you are a conspiracy theorist, the fact is, something is going on behind closed doors that we are not being told about. We won’t really know until it is too late. And, it is going to affect this country for not months, or years — but decades, generations.

        By the way, for those interested, your last comment reminded me of a Martin Armstrong article called “The Collapse of Capitalism Or is it Socialism?”

        I think you might find this to be an interesting read, where Armstrong essentially argues that the government (Obama, congress, reps, dems, whoever, really) will throw everything, including the kitchen sink at the economy and it will still fail. He proposes that we are in the final throes of not capitalism, but socialism! Very interesting ‘turn-the-question-on-its-head’ kind of approach.

        Here is the link in case you want to scobe it:

        it actually made me feel a little better about the shit hitting the fan.. perhaps my grand kids will be good to go, but as for us — we’re screwed!



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