Marc Faber joins the McAlvany Weekly CommentaryÂ on July 8, 2009 for discussions about unemployment, deflation, monetization and inflation, and general commentary on global economics and financial markets.
Marc Faber on Deflation and Inflation:
There is this debate whether the US will experience, in the next 5 to 10 years, high inflation rates or whether it will go into deflation. Those parties may be right. We may first have deflation, then inflation.
I also want to point out that it is a big fallacy to believe that in weak economies you have deflation and in strong economies you have inflation. The opposite is true, because if my country is growing strongly, i can keep money tight and I can have budget deficits which are basically containing price increases across the board.Â But when the economy is weak like in Latin America after 1981 when the Petro Dollar crisis happened, the response of government is to create fiscal deficits, in other words, they increase government spending. Most of it is usually wasted anyway and at the same time you have easy monetary policies. The two is a recipe for a price increase somewhere in the system.
Identifying Deflation and Inflation:
Marc Faber: Let’s put it this way. I think when you observe markets you have to look for symptoms of developing trends, the markets speak usually…Look at the price of gold. Currencies worldwide have depreciated against s the price of gold. So there has been a loss of purchasing power of the currencies.
I think what we have to watch very closely is the position of the US dollar. It’s not that the weak US Dollar creates inflation. It’s that inflation creates a weak dollar. And, if you see the dollar weakening considerably, in particular against precious metals or against relatively strong currencies like the Asian currencies. I think that would be a signal that some inflation is coming back into the system.
On the other hand, if the dollar is strong as it was in 2008 – in 2008 all asset prices went down for the exception of US government bonds and the US Dollar. In that case I would say that the threat of inflation is not very high, and that would more or less signal the theory of deflation.
Let’s say Â the S&P drops to 800, what do you think the administration will do? Hey, they’ll enact a second stimulus package…At the same time, they’ll monetize even more. So then the S&P drops to 700 and they’ll do a third stimulus package and even more.
The more deflation we have in the near term, the more likely it would be that we will have very high inflation rates in the long run.