Global investor Marc Faber is out with his new monthly Gloom, Boom, and Doom report (subscription -- highly advised) in which he analyzes the global debt problem and what it means for markets in the coming years. Most real financial crises are brought about by debt problems. And the financial system, especially in the United States, has been able to build up more and more debt -- as a total percentage of GDP -- over the years. Is there any mystery why we have been seeing more frequent and larger financial crises? Not really. It's because the investment banks, the powers that be, and governments around the world have allowed debt problems to build and spiral out of control. Marc Faber believes we're still not out of the woods because really nothing has changed with the creation of global debt and leverage. In fact, it may be getting worse. Even after the financial crisis of 2008, after lots of hand-wringing, government actions, meetings, popular discussions, and media analysis, nobody has done anything to stop the trajectory government debt. That means the financial problems have not been solved, and we're likely to have even bigger problems in the future. This was also the topic of a recent cover story in Forbes, the Global Debt Bomb. As Faber shows in his analysis, the more debt is driving the economy, the less productive it is over time. That's because debt-driven economic growth is not really efficient. And we have gotten to a spot where each incremental $1 of debt produces less growth. The best way to look at this is the things that happen in the large investment banks, or in Dubai. They are trying to create growth artificially, by borrowing money and "building things," without real market-based demand. This chart, courtesy of Stifel Nicolaus, shows it best. Dollar growth in GDP per $1 of debt has diminished over time, and we may well be reaching the "Zero Hour" when we find that adding more debt does nothing at all -- but in fact increases our problems.

Source: Stifel Nicolaus

As Faber puts it, "there is a time when additional debt growth does not lead to any GDP growth – the so called 'zero hour,' which, in my opinion, has now been reached." Faber cites studies by economists Carmen Reinhart and Kenneth Rogoff who have show that as you increase borrowings, you are essentially borrowing from future returns, and societies reach a threshold, generally when debt exceeds 90% of GDP, where the "jig is up" and you can no longer create growth with debt. And in fact, if you try to push against these facts, you risk creating runaway inflation. [caption id="attachment_952" align="aligncenter" width="557" caption="Source: Carmen Reinhart and Kenneth Rogoff"][/caption] What you see above are the diminished returns of increasing debt, and the fact that you reach a point at 90% of GDP where you enter an inflationary spiral. Increases in debt means that risks increase dramatically, and you are subject to more "Black Swan" financial crises. So how does the government believe they can escape the "debt trap"? Faber points out that the options aren't pretty. In the case of the United States, there are really only two: 1) default on obligations or 2) massively monetize the debts by printing money and creating inflation. Faber concludes that #2 is most likely the answer, because the alternative is a deflationary debt withdrawl which would cause more economic pain and force the removal of most politicians from office (hmmm, would that be such a bad thing?). What's Faber's investment thesis from all of this?  "Avoid long term fixed interest securities (except for temporary rallies), avoid cash, and on market weakness buy assets such as equities, real estate and commodities – in particular precious metals." He is still bullish on gold, though he believes it could be correcting to between $950-$1050 per ounce. Faber is also concerned about recent indications of a slowdown in China, which would in the near-term bring a correction to most asset classes, including commodities and equities. He expects a "choppy year for equities," but he's looking to buy sell-offs in equities and commodities in expectation of the coming phase of inflation. As he puts it, any significant decline in the markets will be met with stimulative policy responses and money-printing from global central banks.