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Predictions of War, Financial Bust, and More Gloom

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How likely are these scenarios? And is there a way to prepare?

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Faber: Eventually there will be a big bust and then the whole credit expansion will come to an end. Before that happens, governments will continue printing money, which in time will lead to a very high inflation rate, and the economy will not respond to stimulus.

Mish: The economy isn't responding to stimulus right now, at least in any meaningful way. One hundred percent of the GDP growth was directly related to government stimulus. The idea that government spending can start a genuine economic recovery is ridiculous. Nonetheless, government spending can start an artificial boom.

The housing bubble is an example of an artificial boom. However, for a boom to start, individuals and businesses have to be willing to go along. That's the way it works in a credit-based economy.

Right now personal credit is contracting, credit card lending is falling, and businesses simply don't want to expand in the face of tax increases and high unemployment. Unless and until the Fed reignites another credit boom, high inflation is unlikely.

The fear now should be more of what Congress does than what the Fed does. Yet it seems Congress is getting a bit leery over these huge deficits. Congress will spend of course, but will it be enough to matter much? I doubt it, at least until we have more purging of consumer and corporate debt via bankruptcy.

Faber: US government will increase its stimulus spending should the Standard & Poor's 500 Index fall toward 900.

Mish: Agreed, but it will not help for reasons stated above.

Faber: The S&P will not drop below 800 or 900, and eventually will go higher in nominal terms, but not necessary in real terms. A correction is coming in the near term.

Mish: I doubt the bottom is in, but it could be. If it is in, then I expect a retest closer to 700 than 900. It's conceivable the S&P drops to 500, which by the way I think is fair value. Japan had two lost decades and I expect the US will have them as well. (See also US Facing Its Second Lost Decade)

Faber:
The capitalistic system "as we know it today" will collapse.

Mish: Agreed. The credit-based fiat model of fractional reserve lending and fabrication of money out of thin air has reached its pinnacle. (See Modeling Our Fiat World for more details.)

Global wage arbitrage and outsourcing are icing on the cake. Mathematically it's impossible for the current Ponzi scheme of ever-increasing levels of debt to survive. When and how it finally blows up is the only issue.

Faber: Central banks will continue to print money at full speed, but long-term, this strategy will lead to a fall in purchasing power and living standards, especially in developed countries.

Mish: Agreed

Faber: The years 2006 and 2007 were "the peak of prosperity" and the world economy is not likely to return soon to that level.

Mish: Agreed. I had quite some time ago proposed Peak Credit and her twin sister Peak Earnings have arrived. Here's a snip from the former:

That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed.


Faber: The best way to deal with any economic problem is to let the market work it through.

Mish: Agreed.

Faber: The way communism collapsed, capitalism will collapse.

Mish: I disagree on a technicality. Capitalism will not collapse, because we're not practicing capitalism. Instead, we're practicing a perverse blend of corporate fascism, socialism, corruption, and padding of the pockets for and by those running the country. Yes, that will collapse.

Faber: "No decent citizen should trust the Federal Reserve for one second. It's very important that everyone own some gold because the government will make the dollar (in the long term) useless."

Mish: No decent citizen should trust any central bank anywhere. The problems go far beyond the Fed and in the long run all fiat currencies are worthless. Fiat currencies don't float, instead they all sink at varying rates.

No positions in stocks mentioned.
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