Will the result of 2009 be hyperinflation?
"There is no such thing as good public policy, certainly not in the U.S. The current crisis was produced largely by policy measures that led to the formation of Fannie Mae and Freddie Mac, and later the repeal of the Glass-Steagall Act, which had prohibited banks from owning brokers. It all led to increased leverage. Fed policy has been a disaster. Instead of smoothing markets, it has increased volatility. By cutting interest rates the Fed created bubbles -- in housing, in commodities. Now that the federal-funds rate has been slashed just about to zero, you're not getting anything for your money when you deposit it in the banking system and buy Treasury bills. There is no such thing as investment; everybody becomes a trader.
With a few exceptions, the U.S. doesn't produce anything. It is a consumption-led economy. When the economy expands, the U.S. imports from other countries, such as China, which increase industrial production and capital spending. From 2002 to 2007 the markets of emerging economies outperformed the U.S. But when the economy slowed in 2008, it was a catastrophe for these economies. They immediately cut spending and production, which affected demand for commodities. Last year, emerging markets were hit much harder than the U.S.
Cohen: The P/E ratio of the Chinese market was more than 50 times earnings at the end of 2007, so the issue isn't only fundamental demand but relative valuation.
Faber: I'm aware of that. I recommended shorting Chinese stocks last year. It would be best at this point for the U.S. to have 10% less consumption. It would make people save again and follow Christian principles of frugality and humility. I doubt it will happen, but it would be good for the U.S.
We've had history lessons, and now, religion lessons. What does any of this mean for 2009?
Faber: The U.S. economy fell off a cliff between October and December, and will stabilize at a lower level of activity. Some indicators may look better than expected, which will justify the present rally. Stocks already are up 25%. If they go up 50% from the Nov. 21 low of 741 on the S&P, you'll have the S&P at around 1,100. Afterward, reality will set in and in real terms the market will go much lower for much longer.
Around the world, governments are throwing money at the system to revitalize debt growth. When an economy is credit-addicted and debt growth slows, it is a catastrophe. With the Fed buying up everything and boosting the federal deficit, hyperinflation will be the result down the line."