Swiss-born stock markets guru Marc Faber believes the global economy is standing on the verge of rampant inflation, national debt default and renewed volatility.
In an interview with swissinfo.ch, Faber criticised central banks for exacerbating the current problems with the same low interest rate policies that he blamed for causing the financial crisis.
Faber, known as Dr Doom for his uncanny ability to predict stock market crashes, was addressing business leaders at the International Alpine Symposium in Interlaken on Wednesday.
swissinfo.ch: What are the major economic problems facing the world today?
Marc Faber: A lot of liabilities in the system have been shifted from the private sector to the government sector. The next train station in the global catastrophe journey is when governments go bust. That could happen in five, ten or 15 years.
Prime candidates are Greece, Ireland, Portugal, Italy, Ireland and Spain. Debt to GDP [gross domestic product] levels are also high in the United States and Britain. The US is bust today according to fair accounting standards. If it was a corporation it would be rated CCC and not AAA.
swissinfo.ch: How could whole countries go bust?
M.F.: Governments in the Western world will start to find problems fulfilling their obligations, such as unfunded pension schemes and healthcare schemes.
The worst case scenario is that interest payments on government debt will rise very strongly, forcing monetisation [printing money], and that would lead to hyper-inflation and a breakdown of the system. But before that happens the US would go to war – that is the horror scenario.
swissinfo.ch: So you fear inflation rather than deflation?
M.F.: In the next ten years we will get more inflation. The debt levels in the Western world, especially the US and Britain, are so large that they will have to print more money and this will lead to inflation.
swissinfo.ch: How do you rate the performance of central banks?
M.F.: Monetary policy has created economic and financial instability and higher volatility. Keeping interest rates artificially low after 2001 created the housing and subsequent credit bubbles.
After September 2007 the [US] Federal Reserve again slashed interest rates so oil prices went up from $75 to $147 a barrel, and that was like an additional tax on the consumer.
swissinfo.ch: Switzerland was recently praised by the Organisation for Economic Co-operation and Development (OECD) for the way it tackled the crisis. Do you agree?
M.F.: Switzerland is pursuing the same [low interest rate] policy as the US, which is penalising savers. People have to go out and speculate to make money and that is a very questionable policy. Such low interest rates are subsidising the financial sector, which is also a very debatable policy.
swissinfo.ch: The one bright light on the horizon appears to be emerging markets, led by China. But are we not witnessing another bubble here?
M.F.: I am reasonably optimistic about emerging economies. In Asia the debt levels are relatively low. We have some bubbles in some sectors in China, but because the market is not yet saturated, so even if the bubbles burst I don’t think we will see a total collapse. Car sales in China exceeded those in the US last year and India added 120 million mobile phone subscribers in 12 months.
swissinfo.ch: How do you see the stock markets behaving in 2010?
M.F.: Between 1980 and 2008 we had a tremendous outperformance of long-term government bonds compared to equities. This is changing, making equities relatively attractive.
Having said that, we had a major low in March 2009 and [stock markets] have been rising very strongly since then. Bullish sentiment is quite high but a correction is overdue.
[However], I think the markets will eventually go higher and we could close 2010 at the same level, or a bit lower, than we closed in 2009.
Matthew Allen in Interlaken, swissinfo.ch
Marc Faber was born in Zurich and obtained a PhD in economics magna cum laude from Zurich University.
He has been widely recognised for predicting stock market crashes, including the last financial crisis.
Between 1970 and 1978 he worked for White Weld & Company in New York, Zurich and Hong Kong.
From 1978 to 1990 he was managing director of Drexel, Burnham and Lambert in Hong Kong.
In June 1990 he set up his own business that acts as an investment adviser, fund manager and broker/dealer.
He now lives and works in northern Thailand, but maintains an office in Hong Kong.
Faber publishes a monthly investment newsletter, entitled The Gloom, Boom and Doom Report.