Marc Faber on why further correction is coming: Part 2

March 5th, 2007

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Today, continuing from our previous article, Marc Faber on why further correction is coming?Part 1, we will discuss ?what can trigger the contraction of money substitutes (i.e. a contraction in liquidity) which in turn will trigger a deflation of asset prices (i.e. seen as a ?correction? in the markets)?? If you want to hear Marc Faber?s opinion for yourself, you can go to the video interview here.

As we said before, excess liquidity is the primary driver for the global asset bubbles that we see today. Much of the liquidity comes from the US current account deficit in which excess US dollars get exported to the rest of the world (we will, in subsequent articles, elaborate on how excess US dollars contribute to global price inflation and asset bubbles). What is happening is that over the past few months, the US sub-prime mortgage lending sector (lending to people with less than favourable credit rating??low doc? loans in Australia) is running into trouble (see Bond default protection shoots up for banks). That means, a trend towards credit tightening is already underway in the US. Marc Faber?s view is that this trend will affect the economy by crimping back on consumer spending, which is dependent on rising asset prices fuelled by credit. That in turn will mean that excess global liquidity growth through the US current account deficit will decelerate.

Of course, there are many in the mainstream that does not hold the view that the ongoing recession in the sub-prime lending sector will pull the economy down into recession. For those of us who adhere to the Austrian School of economic thought, our prognosis will be different.