Man Who Oversees $150 Billion Warns Of Hyperinflation

Arnott:  “The Fed has painted itself awfully far into a corner and there is no graceful way out.  When you reach a point where talk of ‘tapering’ causes markets to tremble with fear, that’s not a good place to be because it means that you’ve really got the markets addicted to the newly printed money.

And the only way to get the markets attention is to give it more (freshly printed money).  It’s just like a crack addiction.  This is not healthy and doesn’t play out nicely, and you do have asset bubbles fueled by central bank profligacy all over the world.  That also sows seeds of risk because as the Fed backs off from the quantitative easing you wind up creating risks of pretty sharp and adverse market reactions..

“Most investors aren’t remotely prepared for that.  So it’s very important to get ahead of those risks, and most people are very leery about doing so because they don’t want to miss the last gasp of upside.”

Eric King:  “A great inflation is coming at some point isn’t it?”

Arnott:  “It’s highly likely.  It’s not a foregone conclusion, but it’s highly likely.  The thing is when you print money, at some stage when the velocity of money stabilizes, and it’s been falling so it offsets the printing of money, but when the velocity of money stabilizes, then the money printing creates inflation.

The only way to reign that in is to stop the money printing, which creates economic dislocations because the economy has gotten so addicted to these new infusions of newly printed money.  So what we have is a situation in which the Austrian economic views are deeply shunned.  You don’t even have to read Adam Smith to get a PhD in economics these days.  How shocking is that?  And Keynes is in the ascendancy.

Unfortunately every empirical test of Keynes’ theories has failed.  Every empirical test shows it doesn’t work.  So you have to ask the question, why is it so popular?  Well, it’s the only model for the way economies function that has a major role for government, and a major role for increasing government as being the answer to many of society’s problems.

So if government wants to grow larger, it’s going to encourage the reliance on Keynes.  Therein lies one of the big problems.  We’re addicted to Keynesian economics.  We’re seeing it fail again, and again, and again.  So the answer seems to be, ‘Well, let’s try more Keynes.  Let’s do it more aggressively.  Let’s go to hyper-Keynes.’”

Eric King:  “The unintended consequences are a potential collapse in the currencies and hyperinflation isn’t it, Rob?”

Arnott:  “That’s exactly right.  If you print enough money you create hyperinflation.  During the time of the Weimar Republic money wasn’t bits on a computer, it was printed.  During that crisis there was a proud announcement from the (German) government that they just bought some high speed (printing) presses, so the problems were going to be fixed.  Well that logic, or illogic, seems to be pretty pervasive today.

You see it in Europe, Britain, Japan, the US, and everyone seems to be in a competition to see who can do the most aggressive quantitative easing.  It hasn’t worked.  And if it hasn’t worked, why is more aggressive quantitative easing going to play out better?

Japan, with the prospect of accelerated quantitative easing, had an enormous run-up in the stock market.  Then, as the actual quantitative easing began, the market faded quite radically.  So the market is basically saying, ‘Yes, I love this free money, but now I’m eventually worried about when we are forced to back off from that.’

So the games that are being played, these games have been tried again and again throughout history.  They’ve failed again and again throughout history.  And the interesting thing is that the response to that renewed failure of ideas which have never worked is to say, ‘Well, let’s try it on a larger scale, and on a global scale, and maybe it will work that way.’  It won’t.  It can’t.”