Saturday, March 13, 2010

Tips from Dr. Doom, and Understanding His Doomsday Scenario

This is a pretty gloomy, yet surprisingly lighthearted interview with Marc Faber, otherwise known as Dr. Doom. I'm glad he can keep his spirits up in light of how he feels about our future!

Faber (and the other fellow in this interview) is obviously as contrarian as one can get. However, in the ten years I've been following him, unfortunately, his opinions have been on the mark. I give him a lot of credit for being able to look at things objectively and for being willing to go on record with unpopular opinions. From my perspective, I like to gather all points of view. Blinders off, so to speak. I then try to form my own ideas based on all of the inputs.

In this video, Faber shares a few ideas on how people can protect themselves financially in the face of what he believes is a coming high-inflation environment. Faber is an advocate of buying "hard assets" that benefit from inflation, such as gold, farm land, and other real estate. This then raises the question of why he believes we'll have high inflation.

The situation is that we will about double our national debt in the next decade. Obama has been very up-front about this. Since this will be during a time when America is doing everything it can just to get back on its feet, there is no expectation that Americans will somehow become wealthier in that time frame, and therefore more capable of paying down that debt. Hence, the likely scenario is that the government will simply print money to do what's known as "infalting away" the debt. In other words, if $200 billion in bonds that China is holding come due, we would simply print the money to retire the bonds. Naturally, that would devalue our currency, which would then make everything we buy from other countries more expensive; i.e., inflation. In addition, it would make issuing additional debt in the future more expensive, as our international lenders got burned last time by getting a devalued currency in return for their bonds. After all, who wants to lend a dollar and get the equivalent of, say, 80 cents in return?

With everything then being more expensive, people would have to cut back on spending, which would create a recession and increase unemployment. With higher unemployment, the government would have to increase entitlements and deficit spending, thus exacerbating the debt problem by having to borrow more at ever-increasing interest rates. This perpetuates the cycle and accelerates our trek towards ruin, which is the doomsday scenario these guys are talking about.

Essentially, people, companies, and countries reach a tipping point when they take on too much debt, and it inevitably takes them down. This is the problem many Latin American countries ran into in past decades, and this is where the so-called "PIIGS" countries (Portugal, Ireland, Italy, Greece, and Spain) are headed today. These two gents are saying we're probably looking at the same fate in about 10 years. Frankly, I'm looking for reasons to refute what they're saying, and I'm having a hard time finding any. Fun, huh?