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Op-Ed: Austrian economics, Fed data agree with Faber that crash is near

By Andrew Moran     Sep 5, 2013 in Business
New York - Marc Faber is known as both a bear on the United States economy and a contrarian investor. Echoing the sentiments of other libertarian investors and adherents of Austrian economics, a crash in the market is imminent.
For months now, administration officials and some financial experts have been claiming that the United States economy is recovering from the Great Recession – or economic collapse, however you look at it. Not every investor or realist, though, agrees with that assessment, including legendary investor and publisher Marc Faber.
The editor of the Gloom, Boom & Doom Report spoke with CNBC on Wednesday and noted that a great plunge is imminent in the stock market. Despite a failure of a correction yet to transpire this year, Faber believes that a correction is going to happen and lows seen in November last year will appear. Overall, he feels that U.S. equities is a better sell than buy.
Faber listed three reasons as to why the economy is not as rosy as some might depict it. One of them is that since emerging markets have been outperformed by the U.S. over the past month or so, it cannot last and equities could experience harm from their costliness.
“When emerging markets go down and the S&P goes up, the asset allocators say, ‘Do I want to buy the S&P near a high, or do I venture back into emerging economies that are down 50 percent from their highs, like India or Brazil and so forth?’ So you understand that the pool of money can flow back into emerging markets,” explained Faber.
Reiterating what he stated last week, the Middle East disaster will contribute to the decline of the stock market.
With President Barack Obama gaining support from high-ranking Republican and Democratic officials in launching a strike against Syria, it is quite likely that war in Syria will take place. This is bad news for the market.
“The Middle East is a powder keg, and it will go up in flames because the Western imperialistic powers, they still meddle into the local affairs,” Faber said. “It’s going to be a disaster. And it’s going to strike from Syria and Egypt into Saudi Arabia, into the Emirates eventually, and so forth and so on, and you’re going to have a huge mess.”
The final reason has to do with interest rates. Despite the Federal Reserve keeping interest rates artificially low, various data and charts suggest that they are steadily creeping upwards and could be a significant factor in the stock market as well as public and private debt. Faber said that interest rates are no longer a “tailwind” but rather “a headwind.”
In the end, the market is due for a correction, according to Faber.
Fed Data & Austrian Economics
The Austrian Business Cycle Theory has shown that slowing down the money-printing process is usually followed by a great crash in the stock market. Writing in “America’s Great Depression,” legendary Austrian economist Murray N. Rothbard highlighted that from 1921 until Black Tuesday, the Fed expanded its money supply in order to create a boom in the stock market. However, when it began to taper off, the market suffered.
Data from the Federal Reserve shows this to be true even in later years. Prior to the stock market crash in October of 1987, the M2 Money Stock declined. Before the economic collapse in 2008, the same money supply data showed it fell dramatically after being increased substantially. Since the first quarter of the year, the money supply has yet again been falling.
Why does this happen? Well, it’s very simple, except for Keynesians: traders, investors and the stock market become dependent on stimulus by the central bank. In addition, the Fed’s regulation of the market through artificially low interest rates and excessive money printing contribute to the immense slowdown and crash in the market.
“The minute they lose confidence that the central bank can print our way into permanent salvation they will start selling bonds and others will sell the bonds and there will be no bid,” said David Stockman, former budget director under the Reagan administration. “It gets liquidated. This is all debt on debt; nobody owns the bond they borrowed 98 cents to buy.”
For years, Austrian economists have been explaining that a central bank constantly intervening itself into the market creates malinvestment and distortion and can send the wrong signals to businesses, investors and savers.
Indeed, there doesn’t seem to be any relent in the future as Larry Summers or Janet Yellen both represent the status quo that Ben Bernanke has practiced for the past seven-plus years. Due to these reasons, should the U.S. “end the Fed?” Indubitably.
This article was initially published on Capital Liberty News.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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