It is mind boggling that people would consider buying 10-year U.S. Treasurys with yields trading at around 3 percent, said Marc Faber, the author of the closely-watched Gloom, Boom and Doom report in an interview with CNBC on Thursday.
“I don’t think the U.S. will default in terms of not paying the interest on its debt. They will though default via a falling dollar as Bernanke begins printing more money,” Faber said.
His comments follow statements by Ben Bernanke on Wednesday in which the Federal Reserve chairman indicated he would consider more extraordinary measures if U.S. economic conditions get worse.
On Wednesday, Moody’s warned it could downgrade America’s credit rating as talks over the debt ceiling became increasingly acrimonious on Capitol Hill.
“They will get an agreement or fiddle around with the debt ceiling,” Faber said.
“I disagree with the bond bulls that are basing their case on a deflationary environment. In such an outcome tax revenues would collapse and stocks would fall heavily.”
Faber predicted that 1,370 was the high for the S&P 500 index in 2011 and told CNBC that if stocks fall another 10 percent or 20 percent from here, another round of quantitative easing is inevitable.
“The risk is not to hold gold. Whilst there is the potential for 10 percent downside in the short term over the next five to ten years the gains will be big. Or put another way, the purchasing power of paper money will fall," Faber said.
“Cash is very risky asset except in times of major market corrections,” he added.