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Mark Faber on his Austrian views

October 28, 2004

This is part of a transcription from an an interview of Mark Faber by Jim Puplava from FinancialSense.com.I think that Faber is right on the money in some areas, but doesn't present a really clear picture of the Austrian view.

Jim Puplava: I want to move on to your views or your perspective on economics. You approach the framework of analysis of looking at economies from the Austrian School of thought. I wonder if you might explain that.

Dr. Mark Faber: First of all, I think it is unfortunate that in the last 10 to 20 years, the world has kind of moved to the American soul. That is if you ease monetary conditions, if you print money, you can solve all the problems of the world. If that was mainly true, Latin America would have become the richest continent on earth simply because they have been masters at printing money and at creating at the result of that hyperinflation. By printing money, you don’t generate economic growth. Temporarily, you can generate continuation of spending patterns.

I will give an example. Since January 3, 2001, the Fed Fund rates were cut massively and the Federal Reserve eased monetary conditions massively. We had very strong debt growth. What this meant was that spending and borrowing in the US went up, but industrial production was flat. Industrial production increased in China, Vietnam and other Asian countries. In China, industrial production was up 19% last year. Exports were up 22%.

In other words, what you do in America is you borrow more money, you spend more money, but the production is somewhere else. And as a result of that, we have growing trade and currency account deficits. In other words, there is a shift of wealth to the Far East as a result of these qualities. In the Austrian School of Economy, they look at the world differently. They recognize that there are business cycles. If there is a new invention, if there is a new discovery of a mine, if there are innovations, then it brings about a capital spending boom, because everyone wants to capitalize on the promised higher profit opportunity. Therefore, you get into boom conditions, which leads to over-capacity, which leads to a price collapse as a result of the profit expectations being disappointed. That is the natural downturn following a boom. The downturn is very important because it cleans out the excesses of the upturn.

But in the American school, the downturn is postponed through monetary measure. In other words, the capacity that never gets cut back, because if you ease massively, you don’t create an environment of the survival of the fittest, but you create an environment of the survival of the weakest. Even the weak market participants, continue to produce, especially if they go into Chapter 11, because then they don’t have to pay any debt payments, and therefore, they can undercut the other. That is why the American school, in my opinion, in the current situation, has policies that will then lead to a prolonged recession at the later stage.

Faber also gives a good overview of the evils of socialism, inspireed by Hayek:

Jim Puplava: You quote in your book from Friedrich Hayek, who made the statement, “The more the State plans, the more difficult planning becomes for the individual.” Why is that?

Dr. Mark Faber: I think if you look at the history of the last 100 years, what is very clear is the Socialist and Communist ideology where everything is owned by the State. The State plans how much is being produced, how much is being consumed, and how goods and services are being distributed within the economic system. I may add that planning economies have all the tools available to do that properly, and yet they miserably failed.

In the Western systems, we have the market economy and the capitalistic systems, which work reasonably well. In the last 15-20 years, the view has come up that the Central Bank can steer the economy forward and backward, through monetary means. Unlike the planning economies of the Socialist and Communist countries, they only have one tool available. Yet people believe in Alan Greenspan, the way they believe as Christians in Jesus Christ, as Muslims in Mohammad. This is wrong. The power of the Central Bank is very limited. In my opinion, the world would be better off if there were no Central Banks around.

There are other interviews with Mark Faber on FinancialSense.com. In one of them, he scathingly criticizes Allan Greenspan as having created more bubbles than have ever existed before, and says that he hopes history will look back and note that. He also said Greenspan is intellectually dishonest, because he's advocated the gold standard There is some debate on what Greenspan's position currently is, and whether or not he's a sell-out.

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