Europe has too many structural problems

In my view, the European economy will not suddenly recover. It has too many structural problems. One way that the so-called "banking crisis" could be resolved, though, is to let inflation rates rise. Asset prices would then shoot up, and loan portfolios would be better covered. But I do not really think that inflation is the solution.

Contrarian Investor Dr.Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.

Marc Faber: I should thank Bernanke

I own equities, and I should thank Mr. Bernanke. The Fed has been flooding the system with money. The problem is the money doesn't flow into the system evenly. It doesn't increase economic activity and asset prices in concert. Instead, it creates dangerous excesses in countries and asset classes. Money-printing fueled the colossal stock-market bubble of 1999-2000, when the Nasdaq more than doubled, becoming disconnected from economic reality. It fueled the housing bubble, which burst in 2008, and the commodities bubble. Now money is flowing into the high-end asset market—things like stocks, bonds, art, wine, jewelry, and luxury real estate. The art-auction houses are seeing record sales. Property prices in the Hamptons rose 35% last year. Sandy Weill [the former head of Citigroup] bought a Manhattan condominium in 2007 for $43.7 million. He sold it last year for $88 million. Money-printing boosts the economy of the people closest to the money flow. But it doesn't help the worker in Detroit, or the vast majority of the middle class. It leads to a widening wealth gap. The majority loses, and the minority wins. Although I have been a beneficiary of this policy, I can't approve as an economist and social observer.

Contrarian Investor Dr.Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.

Cyprus bailout dilemna

European policymakers believe that in the next round of bank bailouts the depositors will have to pay their part, as was the case in Cyprus. The main question is who pays for what? In Cyprus, accounts up to €100,000 ($129,000) are adjudged to be safe, but accounts above that limit may lose as much as 40-60%. There is a question of social equity here: why should a depositor with €5M in a Cyprus bank lose, while a depositor with less than €100,000 sits pat? There is also a technical problem. Say you are a homeowner in Cyprus and you sold your house for US$1M the day before they announced the confiscatory measures. The buyer paid you $1M and you deposited it in the bank. Now, you will now lose 40-60% of your money, but you haven't done anything wrong. You just sold your house. Or what if I own no land, but have stored all of my wealth in bank deposits? The technical and political details involved in making bail outs fair—spreading out the pain—are very difficult. It may not be feasible to sanction depositors.

Contrarian Investor Dr.Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.