STAFF NEWS & ANALYSIS
Marc Faber: 30 Percent Chance China Will Crash and Burn
By Staff News & Analysis - February 25, 2010

Investment guru Marc Faber (left) says there's a 30 percent chance that China's "soft landing" will turn into a crash-and-burn, taking most commodities with it. "I think to some extent (China) is a bubble," said Faber, the editor of "The Gloom Boom & Doom Report." "Last year, total loans by banks have increased by a quarter of GDP. In addition to this they have large excess capacities across industries," he told the Smart Investor. Faber says he expects the Chinese economy will slow down considerably. "The bigger question is that, 'Will It Crash?'" he asks. "To that, my answer is: 'Yes, That Is Also Possible.'" He thinks "there is 99 percent possibility that China will slow down considerably and I would say there is 30 percent chance that it will crash." … Though India's long-term economic growth should find support in its huge and growing population, China's really incredible economic growth during the last 25 years means the country will slow down. "For China, 10 percent economic growth rate is not sustainable in the long run," he says. – MoneyNews

Dominant Social Theme: Global economy – maybe good, maybe bad.

Free-Market Analysis: The view we enunciated nearly a year ago (that China was in a bubble) is steadily being recognized by top investment pros, most recently the well-known Marc Faber. China is important to the world's economy. If China is in a bubble, and if that bubble should pop, the current global economic crisis would be exacerbated, perhaps considerably.

Is that a gloomy perspective? We didn't set out to be gloomy – though lately we have been accused (by at least a few) of being pessimistic no matter what the news. We would argue it is just the opposite. We are optimists. But we owe it to readers to be realistic (or you won't read us anymore, as you are, thankfully, in ever greater numbers). Nearly ten years ago it occurred to us that gold was going to go to at least US$1,000 in the first decade of the 2000s. The rest of our perspective has flowed logically from that perspective. We try to deal with what IS and WILL BE rather than with what could be and might be.

Our analysis is simple enough. It stems from a realization that we live in a central-banking era, at the heart of a great experiment in which honest money has been dethroned and fiat is now king. Money unlinked from any commodity is money that government (with the aid of private parties) can inflate at will. In the past 50 years especially, since US President Richard Nixon abrogated what was left of the gold standard, America's inflation of the dollar has increased dramatically. Bush II, with his serial war-making and domestic "compassionate conservatism" was seemingly enough to push the dollar over the edge. Yet Obama has proven even worse.

Unfortunately, it is not only America that has proven profligate in the central banking era. Around the world, the Anglo-American financial model has been applied with results that were until recently stimulative and now are not. Much of the developed world is indeed suffering through what some would call a depression (though Lord knows nobody is EVER supposed to use the "D" word). We don't put much stock in the perspective that America and the West are gradually "emerging" from the current financial crisis – though anything is possible, we suppose. However, we can't help noting that such perspectives were offered up endlessly during the Great Depression, with little truth. Sorry, there we go being gloomy again!

There ARE bright spots of course. China has been one of them and India another. Thus, we've actually taken no great pleasure in pointing out that the mechanism driving these countries is the same one that has driven the West – Europe and America – off a cliff. But that is our brief, in fact, to analyze the dominant social themes of the power elite and to point out their falsities along with the eternal verities of the free-market itself. Global warming was a big promotion, and one that has begun to fail thanks in large part to the Internet. But central banking – its efficacy and bounteousness – is among the biggest of all power promotions. And it is failing too. It should. It doesn't work.

Central banking, and the fiat money it produces, inflates economies dreadfully, until one day they just explode. People (and investors) pick up the pieces and start over again. It has happened multiple times in the West during the past 100 years (the full ambit of the modern central banking era) and it will doubtless happen in China and India, too. If Africa can be consolidated and central banking introduced to that bedeviled continent, doubtless the same syndrome will occur there. It is the curse of this particular system, which in our opinion, has almost had its day.

As and we indicated above, more and more share our view as the global economy continues to unravel. Jim Rogers, the brilliant commodities entrepreneur and free-market thinking investor has given the Bell a wonderfully insightful interview (to be presented over this Sunday), which deals with the ups and downs of China in a definitive manner. Long-term Rogers is no doubt correct about China's terrific prospects. But (without giving away too much) even Rogers – ever the canny realist – admits China will face some difficulties just like any other nation. (Check back on Sunday).

And as long as we're on the subject, let's not forget to point out, as we have in the past, that the Chinese industrial and financial inflation is shared by India which is growing at up to seven percent per quarter or more. Used to be if the US grew at 3 percent PER YEAR that was considered pretty darn good. For India and China to grow regularly at double digit rates is not in our humble opinion a symptom of economic well being so much as a sign that the nations' respective central banks are busily at work pumping out an overabundance of fiat money. Here's the view of China from yet another quarter:

Maybe you shouldn't put your nest-egg in Anthony Bolton's China basket … Three years after he stepped back from day-to-day management of [Fidelity UK's] Special Situations fund, Bolton is back with plans for a new £600m-plus vehicle to invest in China … Yet the past performance of high-profile funds isn't actually that great. … Bolton is convinced that, unlike the race into Tech stocks a decade ago, the rush to invest in China is no bubble. The veteran stock picker describes it as "the investment opportunity of the next decade". But it has emerged that even his own colleagues are unconvinced. Jorma Korhonen, who manages Fidelity's Global Special Situations Fund, reportedly describes China as "one of the biggest capital allocation mistakes ever". Lets hope that Bolton's comeback lives up to the hype. – UK Telegraph

You see, dear reader, we do not stand alone in our viewpoints these days (though once we stood alone as regards a number of them). No, by nature we are not pessimists. We think a new day is dawning. We think central banking is crumbling. We think the power elite will have to take a step back from its incessant warring and general mischief making. We think there will be a diminution of its fear-making apparatus. We think the Internet has awakened enough people now so that the entire painstakingly created discipline of fear-mongering is failing to have the desired effect.

There is more to come regarding the great unraveling. The Internet is making sure of that. This downturn is not like the others. It is occurring, thanks to the 'Net, in the full view many thinking people who can see the manipulations occurring in real time. It has occurred to many, as we have previously pointed out, that they live in a criminal era, where banking cronies literally release trillions to ensure perpetual solvency and wealth for a few while so many others lose their livelihoods, houses, etc.

After Thoughts

The power elite and its related bureaucracy struggle seem to be backtracking. Suddenly, it seems they are sincerely attempting to reignite economic well-being. Too much has taken place too quickly – and thus all may be lost for the moment. Those who placed the West – the entire developed world – into this parlous state may spend their days wiping flop sweat from their collective brow. First they were contemptuous of the effects of the Internet. And now they are realizing that their push to create a closer global economic and regulatory union – via what might be considered economic terrorism – is not going to work out all that well either. Too bad for them. But pointing it out doesn't make us pessimists. Don't shoot the messenger.

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