Dr. Gloom Leaves Dr. Doom at the Precipice

05/31/2012 10:00 am EST

Focus: MARKETS

Howard Gold

Founder & President, GoldenEgg Investing

At least one of the legendary bears who predicted Zimbabwe-level catastrophe for the US economy has moderated his views, but the other seems more entrenched in the fallout shelter than ever, writes MoneyShow editor-at-large Howard R. Gold, also of The Independent Agenda.

They are this era’s Dr. Doom and Dr. Gloom, two Cassandras who warned long ago about the housing bust, financial crash, and debt explosion that almost wrecked global markets.

Dr. Marc Faber, the Zurich-born investor and editor of The Gloom Boom & Doom Report, and Peter Schiff, CEO of Euro Pacific Capital, were lonely voices in the mid-2000s when they predicted the debt-induced party would soon end very badly. And no doubt, events have vindicated most of their maverick views.

But since then, they, unlike other permabears like Nouriel Roubini and Gary Shilling, have gone much, much further, warning repeatedly about the collapse of the US dollar and hyperinflation of the kind experienced in Weimar Germany in the 1920s and Zimbabwe a few years ago.

Those comparisons have become articles of faith among hard-money conservatives, who like Schiff and Faber support libertarian presidential candidate Ron Paul.

Many of them—with good reason, I might add—blame the Federal Reserve under Chairman Alan Greenspan for keeping interest rates artificially low, producing cheap money that led to bubbles in stocks and real estate, as well as an explosion of debt-fueled consumer spending.

Schiff and Faber also took to task Greenspan’s successor, Ben Bernanke, for pumping $2 trillion into the system since the financial crisis began through two rounds of “quantitative easing.” They say all that extra money (which banks are holding as reserves) will flow back into the economy and spur hyperinflation and the collapse of the greenback.

There’s a big problem, though. Neither hyperinflation nor a dollar collapse has come remotely close to happening. The US dollar index trades in the low 80s, about where it was five years ago, and investors worldwide can’t get enough of dollar-denominated US Treasuries, whose yields recently hit 60-year lows.

And hyperinflation? When I first wrote about this topic two and a half years ago, I pointed out that hyperinflation was a rare occurrence defined as 50% price appreciation per month.

And sorry to burst your bubble, folks, but since then, inflation has been pretty mild—the consumer price index is up only a little since July 2008. The independent Billion Prices Project @ MIT’s US Daily Index shows inflation pretty much tracking CPI.

And even if you hang your hat on the controversial Shadow Government Statistics, inflation is tracking at 6% by one measure and 10% by another. That’s nowhere close to hyperinflation, Weimar Germany, or Zimbabwe at 79.6 billion percent a year.

This means only one thing: Faber and Schiff have been demonstrably wrong about the dollar’s collapse and hyperinflation. If you still think otherwise, please re-read the data in the previous paragraphs and get back to me.

So, I contacted them to see if they would admit it and stop beating this dead horse.

Schiff spoke with me for nearly an hour this week, and the man who declared to US News in 2008, “the reality is I don’t think I’ve been wrong on anything,” has changed his tune a bit.

Schiff never mentioned Weimar Germany in his new book, The Real Crash, and he wrote, “things don’t need to be as bad as Zimbabwe for inflation to cause economic harm.” He views hyperinflation and a dollar collapse as a possible, not inevitable,outcome of the debt crisis.

The book is actually a thoughtful discussion of that crisis and its roots, with plenty of criticism of Democrats and Republicans alike. It also lays out a comprehensive libertarian approach to solving the problems, much like Rep. Paul has expounded on the campaign trail, and which is beyond the scope of this column.

NEXT: Not Backing Away from Hyperinflation

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“I’m not backing away from the fact that hyperinflation is a possibility,” Schiff told me, but he did acknowledge it hasn’t been the reality to date.

In 2008, he told Glenn Beck, “I think pretty soon, maybe a year or two down the line, it’s going to be going at least 20% or 30% a year. The government won’t admit it, but it will be.”

Now, he wrote in his book: “Even when there is not a significant increase in consumer prices—such as existed from late 2008 through 2011—the Federal Reserve deliberately warded off falling prices by inflating the dollar supply.” Italics are mine.

“I’ve always held hyperinflation as the worst-case scenario,” he explained. Eventually, he said, “it’s going to be worse than the Seventies.” Anything’s possible, but that’s a long, long way from Weimar and Zimbabwe.

Schiff also partly walked back his predictions of a dollar collapse. In that 2008 US News piece, he said: “At a minimum, the dollar will lose another 40% to 50% of its value.”

Now he told me, “I thought the dollar index would get down to 40. The dollar index did get down to 70.” Schiff explained that given his economic scenario, a rapidly falling dollar was a reasonable prediction.

“What I didn’t see was in a way, the opposite,” he told me. “People are so worried about European debt that they’re buying the dollar. People are buying the dollar not because the US is sound but because the Eurozone is in worse shape.”

“’Eventually the world is going to understand’ that the US is broke,” he continued. “They’re not going to keep buying our currency.” In fact, he’s predicting whoever is elected president will face a currency crisis in his next term.

Faber also has a long track record of accurate predictions and over-the-top statements alike. In 2000, he advised Bill Gates to sell all his Microsoft (MSFT) stock and buy gold. If Gates had followed that advice, he’d probably be richer than the entire Eurozone (except Germany).

Like Jim Rogers, Faber was an early advocate of investing in emerging markets. And of course, his warnings about the debt bubble were prescient.

But no one has aroused his ire more than the Federal Reserve, which he called “a very evil institution” in a 2011 interview with MarketWatch’s Jonathan Burton.

Faber once said Zimbabwe was “run by a money printer, Mugabe, a mentor of Bernanke.” Robert Mugabe also is a monstrous tyrant and may be charged with war crimes. The comparison with Bernanke is outrageous, but if you consider the Fed “evil,” rather than being, say, misguided or deluded, this lack of perspective isn’t surprising.

And Dr. Faber has predicted again and again, as he did to John Waggoner of USA Today in June 2009, “that US inflation will someday match Zimbabwe’s.”

Over the past week, I sent two e-mails to Faber requesting an interview, and I laid out in detail what this column was about. He replied tersely that he was “traveling and busy until late June.”

I give Peter Schiff credit for his candor. “I’ve gotten enough right that people can give me the benefit of the doubt,” he told me, and that’s a valid point. But I wonder if we’re going to get such introspection from Dr. Faber.

So, let me give him some free advice: Hey, Marc Faber, why not just can this Zimbabwe talk for good? There’s a difference between being provocative and being preposterous.

Dr. Gloom has walked back across that line. Now it’s Dr. Doom’s turn.

Howard R. Gold is editor at large for MoneyShow.com and a columnist for MarketWatch. Follow him on Twitter @howardrgold and read his political commentary at www.independentagenda.com.

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