Marc Faber: Some Misallocation Is Worse than Others
In this recent CNBC interview, Marc Faber predicts the Fed will lower interest rates yet again this summer, and may even resort to negative interest rates in time. Faber recalls that Yellen had suggested negative rates as a possibility in 2009.
Moreover, he suggests that, given the very large difference in yield between US debt and German and Japanese debt (US yield is much higher) the dollar should actually be much stronger than it is. He concludes that the dollar will “tumble” if the Fed moves much lower in the target rate again. He says he would not trust the dollar “in the long run.”
Another interesting point he makes is the different types of misallocation in China versus the West. He admits that much central-bank-created and government-spent money in China was misallocated. And who could claim otherwise, given the famous ghost cities that dot the Chinese map?
On the other hand, Faber notes that much of the money was also used to build infrastructure — presumably roads, railways, and water treatment plants, etc.
This sort of spending, Faber insists, could at least partially help future economic growth, and is thus not as bad as the spending done in the West where the spending — and thus the resulting misallocation — was primarily in “transfer payments” from “taxpayer A to taxpayer B.”
In other words, in the West, most of the money is just being moved around so people can buy granite countertops at Home Depot or to buy trinkets on holiday.
There’s some truth to this, although perhaps not as much as Faber thinks. The same argument was made for the trancontinental railroad in the US, which was immediately identified as a boondoggle by more adroit observers. The retort from railroad supporters, though, was that “at least we have a railroad now, even if it was poorly managed in its construction.”
But, even that’s not really true, because railways, like highways, and water treatment plants, require constant maintenance and upkeep. Moreover, the opportunity cost of building an unnecessary railroad in the 1860s was very high since better technologies would exist later that made building railroads much cheaper and profitable in the 1880s and 1890s. Not surprisingly, the transcontinentals did not actually become profitable until the 1890s (as merchants often used the Panama-Canal railway instead). And thus, resources were locked up for 30 years in a railroad when they could have been better spent elsewhere.
So, was all that government and central-bank money spent on infrastructure better spent because it was on infrastructure? It’s quite possible that in some places, there was a true demand for such things, and that infrastructure will indeed facilitate economic growth.
But, just because something is a highway or a railway does not mean it’s automatically a net good. There are many places in the world that could benefit from a highway or a railway. The question is: is it economical to do at this time. If the answer is no, then it’s a misallocation, and of course, the only way to answer the question is to use market pricing, not the political process.