Rob Arnott continues:

“It’s fair to say that the Fed has been very aggressively running the printing press with QE1, QE2 and an array of other programs, Operation Twist being another example.  If the Fed is running the printing press, they are monetizing debt, they are debasing the currency in order to reduce the real value of the debt.  This does have long-term consequences.

One of the things I think is interesting, and people got a little blindsided, is people thought we would pursue somewhat the same policies as Japan and have somewhat the same course as Japan.  Now, of course, the tumbling of interest rates is reminiscent of Japan, but let’s not forget Japan began its two lost decades with a relatively small debt burden.  That’s not true for the US, our debt burden is quite substantial, 100% of GDP this month.

That’s a daunting burden.  That doesn’t even count the GSE’s, now backed by the US government, it doesn’t count state and local debt and when you add those in you are at 170% of GDP, which is higher than Greece.  If you add in unfunded social security and medicare you are at 460%.  If you add in unfunded medicaid you’re north of 600%.

Just to put that into a personal context, if your readers think back on what they made last year, multiply that by six and imagine writing a check for that amount, that’s your share of our aggregate indebtedness.  So, yes, I do think inflation is a much more serious risk for us than it was for Japan.  Partly because our debt is much higher, all inclusive, if you include entitlement programs, than Japan’s ever has been. 

The best evidence that people are starting to pay attention to inflation is TIPS (Treasury Inflation-Protected Securities).  The TIPS market has gone from a 4+ yield ten years ago for the whole spectrum of TIPS, from short, intermediate, long-term, to a  yield that is now negative out to ten years.

If you want to commit to lending the US Treasury money for thirty years, fine, you are going to get a 1% yield on TIPS.  Now that sounds horrible and relative to the past it is, but let’s suppose you get inflation suddenly clocking in at 8% or 10%, is somebody going to care whether then get 1% or zero on the TIPS?  No, they are going to care that the TIPS have a contractual link with CPI.  But that brings up another issue and that is the CPI is being systematically understated between what they call hedonic adjustments and geometric averaging.”

Rob is one of the brilliant original thinkers in the financial world and he is warning investors to expect tremendous inflation going forward.  What that means is investors will have to protect themselves by owning real money, gold and silver.   In his interview he discusses where he sees things headed for the US and Europe, inflation and more.   Rob Arnott’s audio will be available shortly and you can listen to it by CLICKING HERE. 

© 2011 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

Eric King

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© 2011 by King World News®. All Rights Reserved. This material may not be published, broadcast,

rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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