Bernanke's helicopter malfunction

Federal Reserve chairman Ben Bernanke once said central bankers should drop money on beleaguered economies by helicopter, as necessary. But veteran strategist Marc Faber is unimpressed, saying it tends to land in the wrong place.

For now, central bank money drops should continue to push up stock market prices, benefiting distressed assets which have not, as yet, benefited from inflows. Four months ago, southern European bonds and equities fell into that category, and Faber was among the investors to pile in.

But Faber, author of the Gloom, Boom, Doom Report, warned in a London speech that there could be a price set back of 20% at any time. He has stopped his southern European buying spree: "They have risen far enough, for now."

Longer term: "There will be colossal collapse in the financial system, where values could fall at least 50%.”

At which point, governments could seek to defend themselves by blaming others for their problems, leading to the risk of war.

Faber argued indebted governments are only buying time by printing money: “Central banks have come to believe they can solve long-term structural problems with short-run fixes. The trouble is they end up creating new bubbles by lowering interest rates and printing more money. Price rises tend to be uneven. They can go into commodities, housing, art or the pockets of the wealthy. We are seeing Mayfair inflation.”

Speaking at Terrapinn's Dash 2012 conference in London, Faber pointed out that real interest rates are less than zero – significantly less, after taking account of rises in the costs of energy and food items not included in government data.

He said: “The official rate of US inflation is 2.5%. But I believe it is actually between 5% and 10%. Singapore’s data is relatively honest and it is just below 5%.”

Faber pointed out energy has been going up in price much faster, as has food: “New York taxi fares recently went up 17%. Rents in San Francisco are up 9%.”

Asset prices are rising fastest, where wealthy individuals are investing. Former Citigroup chief executive Sandy Weill bought a New York apartment for $43m in 2007 and sold it late last year for $88m: “I see that a similar apartment is now on the market at $99m.”

Faber added that Eric Clapton has just sold a Gerard Richter painting for $34m. It was one of three Richters he bought for $3.4m in 2001.

The trend is benefiting older people who built their fortunes during the post-war period of economic prosperity, while recession is holding back prospects for the young. Cheap money is fuelling Chinese purchases of raw materials from Africa, which is buying its finished goods by way of return. But western economies are out of the loop, and continuing to stagnate.

Western governments have used public sector expenditure to plug the gaps created by the retreat of the private sector, particularly the banks.

Debt has spiralled leading to a hefty bill for servicing interest charges. “It doesn’t matter whether Romney is spending money on the army or Obama is spending money on food stamps. They won’t be able to cut spending and they won’t be able to bring down the debt.”

There is currently a fuss over the US Fiscal Cliff, which will be triggered by rises in tax and cuts in spending at the end of the year, in the absence of a deal between Republicans and Democrats. It doesn’t bother Faber: “There will be a compromise. But I am very worried about the US fiscal unending Grand Canyon.”

Faber is disillusioned by the failure of democracies to agree recovery plans. “Jean Claude Junker (Prime Minister of Luxembourg) once said: “We all know what to do, we just don’t know how to get re-elected after we’ve done it.” Smaller democracies can manage to cut spending, but larger ones find it harder, particularly when they have a large public sector."

By comparison, Faber says, most Asian dictatorships have done quite nicely, thank you.