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GLOBAL GOLD TALKS
TO DR. MARC FABER
INTERVIEW WITH MR. MARC FABER, JULY 2014
Dr. Marc Faber, or Dr. Doom, is the worldwide renowned Swiss investment
advisor and fund manager. After obtaining a PhD in Economics at the age
of 24, Faber worked in New York, Zrich and Hong Kong, and has settled in
Hong Kong since 1973. In June 1990, he set up his own business, MARC FABER
LIMITED. The Gloom Boom & Doom Report is Dr. Fabers famous monthly
newsletter which highlights unusual investment opportunities. He wrote
several books, including TOMORROWS GOLD Asias Age of Discovery that
appeared in 2002.
Dr. Faber is well-known for his contrarian investment approach and is
internationally famous for a number of bold investment decisions and correct
predictions such as in 1987 when he warned his clients to cash out before
Black Monday in Wall Street, or 1990 when he expected the burst in the
Japanese bubble, or 1993 in the case of the collapse in US gaming stocks as
well as warning about the fnancial crises of 1997/98 and 2008.
I was recently at the Gottfried Haberler Conference in Vaduz and
had the pleasure of listening to a speech by Hans-Adam II, Prince of
Liechtenstein. In his speech, he talked about his book The State
in the Third Millennium where he propagates the importance of
decentralization to the level of the municipality, the right to secession
and the privatization of the school system. What are your thoughts on
the topic, and would you like to live in such a state?
What are your thoughts on the privatization of schools? Do you think
its a good idea?
I strongly agree with decentralization. Generally, in small societies, democracy
is more successful than in large societies. In countries like India or the United
States, the federal government has become so large that they take decisions
that are not necessarily in the interest of the individual. This is diferent
from Switzerland, where we have municipalities, Gemeinden, and states,
Cantons, with a lot of decentralized power, which I fnd very desirable.
Well, I think that the privatization of the school system is by and large a good
idea, but not necessarily everywhere. In some societies, schools that are
run by the government are actually quite good, like in Switzerland, Finland,
South Korea, Japan, Norway, Sweden and Denmark. However, in others
they are a complete failure like in the United States where everyone with a
higher income sends his children to private schools. That is very diferent in
Switzerland. Overall, I think in some cases a public school system that is run
by the government can be successful, but in most cases, it is a failure.
Claudio Grass,
Global Gold:
Global Gold:
Mr. Faber:
Mr. Faber:
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So what about the right to secession? Do you support it? Should, for
example, a Swiss Canton have the right to secede peacefully from
Switzerland?
Lets talk about the ongoing power shift from the West to the East.
I fully agree with you. The conference I attended was organized by the
European Center of Austrian Economics Foundation and was propagating
the importance of the individual in economic decision-making versus
central planning. You often quote Hayek and Mises. So, we would like
to know how your Austrian thinking impacts how you look at the world.
Yes, if a jurisdiction fnds that it is advantageous to secede, in other words,
to have autonomy like in the case of the United Kingdom now with Scotland,
then yes, they should have the right to do so. And obviously it would have to
be a right that is exercised by the majority of the people in that jurisdiction.
It doesnt mean that if Scotland secedes from the Empire that they would
become enemies. I support secession, because I believe the individuals
freedom is better protected in a small society rather than in a large one.
Well, basically, everything is connected and interrelated. We had a colonial
system until the end of the Second World War, followed by the rise of
individual countries. And over the last twenty-fve to thirty years what we had
was the rise of China with 1.3 billion people. Because of Chinas rapid growth
and resource dependence (iron ore, copper from Australia, Brazil and Africa,
and oil principally from the Middle East), the Chinese have obviously become
a very important economic force.
Take Africa twelve years ago: trade between Africa and the US was twice the
size of trade between Africa and China. But today, the situation is reversed.
As a result, China has gained large geopolitical infuence due to its growing
economic relations. This helped shift alliances from the US to the East, which
has led to tensions. China has many provinces that are larger than a European
country and as an economic block, China is huge! It dwarfs everything else
in Asia. But now China is surrounded by military bases in Asia, by American
aircraft carriers and by the signed defense treaties between the US and Japan.
Moreover, the Chinese never forgot that Japan had attacked them numerous
times over the past 200 years. Additional disputes between China and its
surrounding countries, Vietnam, the Philippines, Taiwan, and especially Japan
about maritime rights will cause further tension in the region.
Despite these tensions, the power shift is still underway. You have a
superpower like the one Britain was until the First World War and you have
Basically, over the last, I would say, 100 years, the Keynesians and the
Neo-Keynesians thereafter propagated their view that the larger the
government and the more the interventions the better a society becomes.
They have managed to discredit the Austrian School of Economics. As a
result, society in general has turned into an entitlement society where we
have an insurance policy for everything and the government is expected to
pay the bills. And so, the freedom of the individual is undermined. But with
freedom comes responsibility, personal responsibility. This has been pushed
aside and people dont realize that they cant be free if they dont take on
responsibility. Adam Smith said the government should be in charge of a
well-structured legal system, low taxes and defense and nothing else! Instead,
we have more and more socialism and state planning, which diminishes
peoples freedom. I believe we need to have a huge change in society to
make people understand that if you want to have freedom you also have to
take on personal responsibility.
Global Gold:
Global Gold:
Global Gold:
Mr. Faber:
Mr. Faber:
Mr. Faber:
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a rising power like Germany whose economy in 1910 overtook that of the
British. Here you have the superpower that believes in the old order and the
new power that believes it should have more infuence on global afairs. The
resulting tensions create an environment that is favorable for confrontation.
But it doesnt have to come to war. In my view, Chinas long-term objective is
to kick out the US from their military bases, particularly after Hillary Clinton
and Mr. Obama announced the American Pivot to Asia two years ago; it was
a kind of direct attack or confrontational behavior towards China.
Can you tell us your opinion on the recent developments and events in
the world like the Middle East? Will these events in that region further
escalate? Will they have a long-term impact?
Today, we fnd ourselves with the same anti-free market interventionists who
set up the Federal Reserve, the US Treasury and the US government. These
same incompetent professors and academics also run foreign policy in
America and then go and intervene in the afairs of Libya, Syria, Egypt, Iraq or
Afghanistan. And as can be expected, they mess up just about everything. We
have this Wolfowitz Doctrine that says they dont want to tolerate any other
major power such as the Soviet Union or China. So they want to contain
these countries. When these countries become economically more and
more important, the tensions, in my view, are only going to increase.
I think its unlikely that the West will take any action. First of all, they dont
have the money. Second, a survey done by the US military stated that
over 71% of their youth are unqualifed to join the military for a number of
reasons, including educational, behavioral and health conditions. So, if 71%
of American youth are not qualifed, it means the US doesnt have the labor
force to actually implement its foreign policies. And so they resort to private
contracting companies that create more problems than solutions.
Im very negative about the Middle East. I think the whole region will blow up.
Eventually Iraq will be divided into three diferent countries: the Kurds, the
Sunni in the North and the Shiites in the South. All I can say is that, in general,
fnancial markets are not paying sufcient attention to this.
Global Gold:
Mr. Faber:
What are your thoughts on the Chinese-Russian gas deal? Is this a
further step towards the decline of the Dollar or the next step towards
replacing the USD as the world reserve currency?
I think its a symptom of the new world order I was referring to where the
balance of economic power has shifted to Asia and emerging economies.
This becomes very clear if you look at European companies. Where do they
grow? Not in Europe. Asia has become and will remain the growth market.
The gas deal is a big deal in the sense that, it proves how incompetent US
foreign policy is. The US supported the opposition in Ukraine thinking that
Russia will do nothing. But Crimea is strategically important to Russia since
it gives their feet access to the Mediterranean and the Middle East. And so,
by supporting the opposition in Ukraine, the Americans essentially removed
a democratically elected president. He may have been incompetent, but he
was democratically elected nevertheless. Thats democracy! In democracy
you have incompetent people at the top. The Americans also thought they
can push the Russians a bit further by trying to lure Ukraine into NATO. That
was a step too far and so the Russians reacted by signing a gas deal with
China! The signifcance of this deal lies in that the payment will no longer
be made in Dollars but in local currency, the Ruble or Yuan. I think this is
symptomatic of an empire, the US, in decline and a global currency in decline
as well. Dont forget, until WWI, the world currency was the British Pound and
its importance diminished afterwards. And now we have a gradual lessening
importance of the US Dollar.
Global Gold:
Mr. Faber:
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How do you see the economy in China, will it get a lot worse before it
gets any better?
Absolutely! With regards to China, no one knows what will happen but
can we exclude a possible hard landing of China? And the question
is when it comes to this, do you believe it will have an impact on the
geopolitical power shift or is it just a short-term intermezzo for the rise
of China?
Well, nobody knows for sure and Id like to remind you and your readers that
China is unlike any other country. It is twice the size of Europe and the US
combined in terms of population. So it is a huge empire and giant economy.
My view is that the economy is not growing at the rate the government claims
it is. The economy is growing at maximum 4% per annum, because when you
look at export and import statistics of countries like South Korea, Taiwan,
Hong Kong, Singapore, Thailand, Malaysia, and their trade fgures with China,
you will fnd it is not growing or is hardly growing. Under the interventionists
in China there will obviously be monetary easing, fscal spending and so forth,
like anywhere else. And so, they can maybe postpone the problems but in
general, I would say the remarkable thing about the last twelve, ffteen years
is that in the case of metals, Chinese consumption has grown from 12% of
world consumption in year 2000 to now 47% and this Chinese consumption
of industrial commodities was just 2 or 3% in 1990. So weve had this
huge expansion in Chinese appetite for resources. My view is that Chinas
demand for raw materials will not collapse, but it will not grow at the same
rate anymore or hardly grow at all, except for oil. Their demand for oil will
obviously grow in the long-term. But for the industrial commodities, it will
slow down meaningfully. And so the impact on other emerging economies
where we have hardly any growth at the present time, will be felt. As is the
case in the West, real growth will be very difcult for many Asian economies.
Well, I think that there is a very high chance for a hard landing in the real
estate sector, because we have a gigantic credit bubble. Usually these are
created during the periods when credit expands at a faster pace than the
economy and are followed by some kind of hardship. I do not rule out that
government interventions can postpone the problem. They will bring about
new misallocations of capital and maybe even make things worse. However,
because China is so large I think that many sectors can still thrive in an
environment where, for example, the real estate market collapses, so I do
not think that the impact will be that strong.
Weve seen what happened before with the bailout of Mexico in 1994 and
the Asian crisis in 1997. If Mexico had failed at the time, we may have had
a more signifcant setback in emerging economies in the mid-1990s, but
we wouldnt have had the depression that followed in 1998. So in my view,
government intervention can postpone the problem but it may also make
the situation actually worse by not letting the market clear as soon as some
signs of problems appear. If, for example, LTCM hadnt been bailed out, I
dont think the whole system would have collapsed. Some people would have
lost money, I guess Goldman Sachs and the counterparties of LTCM, but it
would not have been a threat to the global fnancial system. But this is whats
being presented to the public by the interventionists, who argue: Had we not
intervened, the whole world would have collapsed.
Global Gold:
Global Gold:
Mr. Faber:
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That brings me to the next question. We at Global Gold think in
scenarios. We dont believe in models, but rather use our common sense
and history as our guide to try to understand ongoing developments
and where they will take us. One of our scenarios for the mid-term,
meaning in the next 5 years, stands for crisis (collapse of the monetary
system or wars), which we weight with 20%. Do you think we are overly
optimistic or pessimistic?
You just mentioned that central banks print like theres no tomorrow
and the debt levels, especially unfunded liabilities are at all-time
highs. Do you think will we see a defationary bust or a Zimbabwe
style hyperinfation? In other words are we approaching the end of a
long-term debt cycle?
That brings us to gold. We at Global Gold consider physical gold stored
outside the banking system as an insurance policy against the collapse
of the actual monetary and fnancial system. We are, therefore, not
going to ask you where you see the gold price, but rather, could you
elaborate on why you personally hold gold and why it makes sense in
your view?
Well, my view is that the current monetary arrangements are not sustainable
in the long run. We have sensitive, overly indebted Western economies in
the US and Europe. It is not visible yet, because the unfunded liabilities
are probably not accounted for. A company under GAAP would have to
account for them, but governments dont have to. What this means is that
the benefts of people will eventually have to be cut either through infation
and adjustments that are below the true cost of living increases or through
reduced payments to the individuals. With benefts going down or through
outright expropriation over the last two or three years, more and more
voices have come up talking about wealth inequality. I previously discussed
the problem of wealth inequality brought about by expansionary monetary
policies where the main benefciaries become the asset holders. Wealth
inequality should be largely addressed through monetary policies in the
sense that you should have an interest rate structure that does not favor the
kind of asset infation we have.
Yes, eventually well have a collapse or defationary bust in asset markets.
Thats inevitable. Printing money can postpone such a collapse but eventually
the bust will occur. Every infation, whether consumer price infation or asset
infation, eventually comes to an end.
Well, frst of all we had the gold bull market from 1999 to 2011 and weve
been in depression since then. If I compare the credit growth, monetary
growth and asset growth among central banks and the whole banking wealth
accumulation that we had in the last ffteen years, I dont think that gold is
terribly expensive. I hold physical gold for the reason that one day I may not
be able to remit money from one country to another. I dont know when this
fnal systemic collapse that I am foreseeing will occur but all I can say is that
in monetary, infationary times, when infation is measured properly, in real
terms: stocks usually dont do particularly well but gold does.
Nobody knows how the world will look like in fve years time. I dont think that
gold investment is the best over the long run, because it doesnt generate
cash fows and doesnt grow. But I think it makes sense to hold it for
diversifcation. My business depends on fnancial markets, so I own stocks,
bonds etc. Most of it is in paper and I want to be diversifed out of paper
into something that is not the liability of someone else. In the bank account,
I depend on the bank. If I own corporate bonds, I depend on the corporation
to pay me back. In the case of physical gold, I dont depend on anyone to pay
Global Gold:
Global Gold:
Global Gold:
Mr. Faber:
Mr. Faber:
Mr. Faber:
me back, but I do rely on well-established property rights. All governments
now largely consist of bureaucrat socialists that are anti-wealth and this
also goes for the Swiss bureaucrats. If a proposal to collect all the gold from
banks and Swiss owners of gold comes up, they are likely to follow through.
I think that the collection of ones gold by the bureaucrats is the largest risk
we have today.
I do agree with you on the fact that bureaucrats pose the largest threat
today. However, I am still confdent that the decentralized political
system in combination with the last remaining direct democracy and
very strong respect for property rights in Switzerland limits the power
and actions of the politicians in Switzerland. At the same time, this
political structure assures that political decisions take much longer
time than in any other country on this planet. Nevertheless, we at
Global Gold monitor regulatory changes on an ongoing basis to be able
to optimally advise our clients should this become necessary.
Global Gold:
Thank you very much, Mr. Faber, for the interview. It was a great
pleasure and an honor to hold this in-depth interview with you today.
Global Gold Inc.
Herrengasse 9
8640 Rapperswil
Switzerland
info@globalgold.ch
WWW.GLOBALGOLD.CH