The Next Phase

With governments around the world cranking up the printing presses and throwing caution to the wind, the stage is no doubt being set for some serious price inflation down the road.

That said, it's my belief that the fallout from a still-bursting credit bubble and an accelerating economic downturn will continue to act as a deflationary counterbalance in the short run.

Eventually, though -- perhaps towards the end of this year -- the wealth being destroyed by defaults and deleveraging will begin to be offset by the supply of money being created by authorities.

In no time at all, the risks noted by Marc Faber in a CNBC.com report, "US Inflation Could Hit 200%: Dr. Doom," might well become a nightmarish reality.

The US risks being hit by Zimbabwe-style hyperinflation and there are signs that the world's biggest economy risks turning into a banana republic, Marc Faber, author of the Gloom, Doom & Boom report, told CNBC's "Asia Squawk Box."

"In the US, we have a totally new school, and it’s called the Zimbabwe school," Faber said. "And it’s founded by one of the great leaders of this world, Mr Robert Mugabe, that has managed to totally impoverish his own country. And that is the monetary policy the US is pursuing."

The government's increased intervention in the economy is likely to slow down economic growth because history shows that every time the private sector shrinks to make way for the government sector, the economy suffers, he said.

Asked whether the US risked being faced with 200 percent inflation, Faber answered: "Well, not yet. Not yet. But I think eventually. If I look at government debt in the US, and debt in general, I think the only way they will not default physically on their debt is to inflate."

The Federal Reserve's policy of printing money and the government's intervention in the economy might undermine the US's economic and political clout, Faber warned.

"Well, I wrote two years ago a report entitled 'Is America becoming a banana republic?' And there are some features that characterize banana republics- totalitarian states, very strong government intervention into the economy, and the polarization of wealth," he said.

"And we have all these trends occurring in the US. We are not yet there. And in theory it could be reversed, but I doubt it will be," Faber added.

Because of these factors, US government and corporate bonds, including that of CNBC parent General Electric, should be downgraded, he said.

"Yeh, I think GE should be a junk bond. But I also think the US government should be junk," Faber said, adding: "I don’t pay much attention to rating agencies. The rating agencies have totally failed over the last 3-4 years to identify sick companies."

To see the accompanying video, click here to go to the CNBC.com site.

Comments

[Carl Bauer]

Michael,

Check out this 1933 Time article. Its a good read.

http://www.time.com/time/magazine/article/0,9171,745618-1,00.html

[Warren Raftshol]

People tired of waiting for a government solution might like to try this woman's:

http://bringthemtotheirknees.com

[wawawa]

Fed’s Yellen sees dynamics similar to Depression

[Independent Accountant]

I have called him Zimbabwe Ben for over a year.

[Ralph Musgrave]

The CNBC report referred to above is simple minded stuff. Yes, of course printing lunatic amounts of money can lead to inflation: every 10 year old has worked that out.

On the other hand if the money printing is done so as to “Quantitatively Ease”, i.e. have government buy up securities, there will be little inflationary effect. There were big money supply increases in Japan for this reason, and no inflation ensued. The reason is that owners of securities regard same as SAVINGS. When those savings are converted to cash, they wont go on a spending spree.

The US monetary base has doubled in the last quarter or so, and my guess is that this comes mostly from Q.E. (but I’m not 100% sure).

And then there is the point that 95% of money is created by commercial banks, not central banks. Commercial banks are DESTROYING money like crazy at the moment as part of their deleveraging. Certainly the money supply collapsed during the 1930s depression.

Next, there is the question as to whether a government has the will or skill to claw back any money supply increase ( or apply other deflationary measures) once the economy picks up.

To summarise, working out whether a money supply increase will be inflationary is extremely complicated. One thing is for sure: we can ignore the simpletons who chant “Mugabwe” or “Weimar” whenever the phrase “print money” is voiced.