Swiss investor Marc Faber, who is known in the business as “Doctor Doom,” has a simple explanation for the budget problems plaguing Washington: “It’s basically a dysfunctional government that we have that is far too large that is essentially wasting money left, right and center,” he told Bloomberg Television’s “Surveillance.”
At fault are both the Republicans, who are “wasting money on the military complex,” and the Democrats, who are “basically buying votes with transfer payments, with entitlement programs, it goes on,” he said. “It is a huge waste.”
What’s even worse is that Faber told Bloomberg Television he doesn’t see a solution to wasteful government spending.
If Republicans and Democrats fail to strike a deal to increase the debt ceiling — the total amount of money the government is authorized to borrow in order to meet its existing obligations — by Thursday, Secretary of the Treasury Jack Lew has estimated that the United States will be unable to pay its bills and the government will default. Of course, that date is an approximation; Goldman Sachs has noted that November 1 is the real cutoff because that is when several obligations will come due, including Social Security and Medicare payments.
Similarly, a Morgan Stanley analyst wrote that the firm expects the $30 billion in cash the government has will last until November 1st, when “several large program expenditures are scheduled.” However, a Social Security bill is due on October 23 and a debt payment is due October 31, so the deadline for when the government runs out of money is fluid.
“This week, if we don’t start making some real progress, both the House and the Senate, and if Republicans aren’t willing to set aside their partisan concerns in order to do what’s right for the country, we stand a good chance of defaulting, and defaulting could have a potentially devastating effect on the economy,” President Obama said at a news conference on Monday.
Still, Faber believes the federal government will find a fix. “If they don’t agree by the 17th, I think what can happen is that the Fed will actually finance the Treasury independently so the interest payments are being met,” he told Bloomberg Television. If the interest payments are not being met, the investor thinks it will cause quite a bit disruption to the financial market. But, “I am not that concerned about that,” he said. “In the end [solving the debt ceiling crisis], is a political decision. I think both parties want to spend. It’s just on different items that they want to spend money.”
Idiocy is “exactly the word” he would use to describe the current debate about the debt ceiling. “I think the current debate about the debt ceiling and the budget is more a symptom of a problem than a problem itself,” Faber said. “The problem is really that the government, not just in the U.S. but other countries as well, has grown disproportionately large and that retards economic growth.”
The fact that both Republicans and Democrats are “big spenders” means the debt ceiling will be increased “sooner or later,” he added, noting that the government’s debt expanded from $1 trillion in 1980 to $5 trillion in 1999 to its current level of $16 trillion. “Both Democrats and Republicans have been big, big spenders because a lot of money flows through the government,” he said in his interview with Bloomberg Television.
For investors, the political crisis is brewing an economic crisis, and there is not a single safe haven left. “Bank deposits are not safe, which used to be safe. Money in Treasury bills is not 100 percent safe because there is inflation in the system and you hardly get any interest. Bonds are not very safe anymore because eventually interest rates will go up,” Faber explained. “Equities in the U.S. are relatively expensive by any valuation metrics you might use.” In his opinion, no investments are safe.
“The best you can hope for is that you have a diversified portfolio of different assets and that they don’t all collapse at the same time,” he added. As for gold, Faber said current sentiment is very negative. “We have a strong rally from the lows at 1,180 to over 1,400 and now we are backing off,” he told Bloomberg Television. “I think between around 1,200 and 1,250 it is getting into buying range.”
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