|Going For Gold|
|May 01, 2012-|
Page 2 of 3
DV: What’s your read on the Treasury market?
Faber: There are two schools of thought. I am sure that, in the long run, Treasuries are an outstanding short. But there is also the shorter term.
If you said to me: “You can buy a 10-year Treasury for less than 2 percent”, I would say to you, playing the devil’s advocate, “It’s unattractive.” And you’d ask: “Why is it unattractive?” And I respond to you with: “It’s unattractive because in America, the rate of inflation is increasing between 5 and 10 percent.”
Different people have different inflation. But non-government statistics show that the cost of living is increasing by 5 to 10 percent per annum, including health care, insurance premiums, fees to the government, educational costs, and so forth. So at 2 percent, basically you have a negative real return, inflation adjusted.
But then, I can also argue: “I know that inflation is, say, 5 to 10 percent. And I only get 2 percent on Treasuries, but what about the stock market? Maybe I’ll lose even more.” So there is a lot of money flowing into Treasury notes and bonds and bills because people know that, for sure, they will be repaid since the government can print money. It is not a question that they will not be repaid, but at what value of the US dollar? That is the issue.
Some of my friends argue that the 10-year yields could drop to 1 percent, which is a possibility. But I think, before we drop to 1 percent on the notes and, say, 1.5 to 2 percent on the 30-year bonds, there will be so much money printing that the fiscal deficits would be so astronomical. Say you assume a 1 percent yield on a 10-year note yield. You would have to assume that we have deflation in the system. You would have to assume that we have gone back into kind of a depression stage. In a depression stage, the tax revenues would collapse. And the expenditures of the government, especially of the Democratic administration, would go up very substantially.
And so instead of the deficit being, say, US$1.5 trillion, it would be US$2.5 trillion. I think, at some point, the market will start to question owning government debt in the US.
DV: Germany seems to be the only parent in the eurozone calling for austerity, calling for spending cuts. That seems to be falling on deaf ears. Do you agree?
Faber: It’s very interesting that you bring this up, because I think the public is being brainwashed by governments and the media that interventions by the government are desirable, and that more stimulus is required, and more government spending on all kinds of programmes is needed. And they argue if the banks hadn’t been bailed out, you would have a catastrophe.
This is the same way that the people in Europe, the media and the government and the interventionists at the Financial Times, will tell you a breakup of the eurozone would be a disaster. But so far, nobody has been able to explain to me, in simple terms, why a breakup of the eurozone would be a disaster. I don’t see it as a disaster. On the contrary, I think countries like Spain and Italy and Greece and Portugal should be out.
DV: Do you think that the geopolitical threat from Iran has subsided at all over the last month? Or is this just Iran biding time a little bit?
Faber: Time is on their side. I’ve seen it with the Japanese negotiations in the 1970s. The Americans always went to Japan and wanted to force Japan to essentially let the yen appreciate strongly. And the Japanese always said: “Yes, yes; we do.” And then nothing happened. But they bought time. And if you talk to the Chinese, they also bide time. Politicians are very good at postponing important decisions.
And so the Iranians will always comply a little bit and continue their programmes. In my view, it is crystal clear that the aim of Iran is to have nuclear weapons. Now we may argue: “Well, should they have or shouldn’t they have?” Pakistan and India and France and Britain and the US and Israel have nuclear weapons. Why should other countries not have? I think Switzerland should have nuclear weapons.