Reminiscent of the 1970s and the U.S. fiscal and monetary conditions which soared gold from $35 to $875 per ounce by Jan. 1980, Marc Faber, author of the Gloom Boom Doom Report warned investors of the dire implications of the world’s central banks presently engaged in a global currency war. Sign-up for my 100% FREE Alerts
But unlike the 1970s and the problems with the U.S. dollar, this time, in addition to the dollar, the euro, pound sterling and yen are also devaluing against everything of tangible value. And the speed at which these currencies depreciate in the coming years will most likely dwarf the decade which included the Vietnam War, Middle East conflicts, U.S. budget deficits and resulting stagflation.
“Somewhere down the line we will have a massive wealth destruction that usually happens either through very high inflation or through social unrest or through war or credit market collapse,” he told CNBC, Monday. “Maybe all of it will happen, but at different times.”
Though the Iraq War didn’t ignite massive protests as witnessed during the Vietnam protests of the 1970s, the extent of the financial damage to the federal budget grossly eclipses the Vietnam War, not just in nominal terms, of course, but in real terms, after inflation.
In December 2011, The Wall Street Journal reported studies at Columbia and Harvard universities estimate the U.S. has already spent approximately an average of $18.5 billion on the Iraq and Afghanistan Wars throughout nine years of conflict. That’s more than three times the cost in inflation-adjusted monthly costs of the Vietnam War, according to research published by Foreign Policy in Focus.
“ . . . studies at Columbia and Harvard universities, estimate the U.S. has already spent $2 trillion on the wars after including debt interest and the higher cost of veterans’ disabilities,” wrote the Journal’s Christopher Hinton.
So, the “massive wealth destruction” Faber expects as a result of war is already baked into the federal budget, contributing to an annual budget deficit of approximately $1.4 trillion, or 10 percent of U.S. GDP. And today’s federal debt has reached $15 trillion. And now the U.S. threatens to go to war with Iran.
In contrast, the culmination of the dollar crisis in 1980 included a $60 billion deficit against a $2.8 trillion U.S. economy, calculating to a meager two percent deficit to GDP. By 1986, U.S. GDP rose to $4.46 trillion and the budget deficit peaked at $220 billion, or approximately a five percent deficit to GDP.
Total federal debt as a percentage of GDP during the blowout deficit spending of the Reagan years peaked at 39 percent—a far more manageable debt load than today’s 100 percent—with expectations of another 10 percent of GDP tacked on for fiscal 2013.
With U.S. GDP still expected to remain flat to negative for 2012 (see ShadowStats.com to access more accurate data), and those very same baby boomers who protested the Vietnam War begin drawing on Social Security and Medicare in greater numbers each year, there’s no other means of funding U.S. obligations short of draconian federal spending cuts.
The overall consensus among economist is, that won’t happen anytime soon, as the Keynesian prescription to a sluggish economy includes further deficit spending, not to mention the political suicide politicians would be expected to make by campaigning on budget cuts to avert a crisis.
The only option left to fund deficit spending will need to come from the Federal Reserve, according to Faber. That means QEIII, much larger than QEII, and more asset-price inflation expected as an outcome.
“It [QEIII] would have to be very significant to boost all asset prices including homes, stocks, bonds and commodities…Much larger [than QE1 and QE2],” he said, suggesting that the only hope the Fed believes it has of generating U.S. consumer spending, therefore GDP, is to raise asset prices as a means of recreating a wealth effect and consumer confidence that has traditionally been generated through higher stock and real estate prices.
In the end, the Fed’s plan won’t work, according to Faber. He believes investors will balk at higher stock prices after earnings disappointments begin to come in.
Basically I think that earnings may begin to disappoint. That corporate profit margins could deteriorate. And I think we still have a lot of issues. Don’t forget we have QE1, QE2 and Operation Twist. I think in order to really hold asset prices across the board much more QE3 would have to be gigantic. I’m not ruling out that stocks can continue to go up but I doubt they will go up at the same rate as the first quarter. And if you look at the technical under underpinnings of the market, they have deteriorated. The list of new highs is deteriorating. The short positions are way down. And we have an overbought condition in the market if we measure the number of stocks above the 50-day and 200-day moving average. So, generally I would say maybe April is traditionally still a month of seasonable strength but somewhere in the next six months I think you can buy the whole market much cheaper.
Faber recommends accumulating gold on a monthly dollar-cost-averaging basis, as well as buying foreign stocks (Asia) yeilding a dividend. Sign-up for my 100% FREE Alerts