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Arnott:  “What we really have going on behind the scenes in all of this is a battle for the soul of a nation.  I look on the battle as one in a very, very long string of battles that will continue for years to come.  This deal (which was just announced in Washington) buys a few weeks of peace....

Continue reading the Robert Arnott interview below...


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“Well, there’s another ferocious negotiation over the size of the debt ceiling and the conditions on which it gets increased.  All of this is in the context of this larger battle.  Ultimately, just as a family has to live within its means, a nation has to live within its means.

The national debt is $17 trillion.  It’s bigger than our GDP.  That’s bad.  But if you add in state and local debt and if you add in the GSEs (Fannie Mae & Freddie Mac), now you are approaching $30 trillion -- you are about 180% of GDP.  That’s about the same Debt/GDP as Greece.  If you add in unfunded social security, Medicare and Medicaid, we (the US) just recently crossed $100 trillion. 

Now, just to put that number into context, (the US has) $100 trillion of obligations.  How much does the government take in in tax revenues?  A little less than $3 trillion each year.  So, if we take in $2.8 trillion, and we owe $100 trillion, we’ve got a problem.  We owe something on the order of 35 years worth of taxes.  And so we are going to default on a lot of these obligations.”

Arnott added:  “We don’t know when inflation will strike.  We do know that massive money printing operations historically lead to inflation.  The purchases are sterilized in the sense that the bonds are purchased and then remain on the books of the government until they mature.  But that doesn’t prevent it from triggering inflation.

Ultimately, we are sewing a lot of seeds for inflation all over the developed world, and this is a developed world phenomenon.  That leads to high inflation odds down the road.  When it strikes remains to be seen -- inflation has this nasty habit of never pre-announcing, it has this nasty habit of lulling us into complacency.

And there is this vicious cycle because as the velocity of money increases you get the inflation.  And as the inflation increases, consumers start to anticipate inflation and start to resist retaining reserves, savings, and as a consequence of that the velocity (of money) increases again.  So the inflation accelerates further.”

Eric King:  “Rob having said that, how dangerous could this inflation turn out to be?”

Arnott:  “Well, I’m loathe to use the term ‘hyperinflation.’  We are the largest economy in the history of mankind, and we like to think of ourselves as immune to such travails.  The simple fact is we are not immune.  Hyperinflation is not a ‘zero odds’ risk.  What I would count as high odds is high single-digit inflation at some point in the coming 3-to-5-years.  And I would say we have better than 50/50 odds of seeing double-digit (inflation) sometime before this decade is out. 

Now, if we get to 10% inflation, that’s going to feel cataclysmic.  But it’s not impossible, and it’s going to be massively disruptive.  I don’t think that’s out of the question, and I do think it will be disruptive to the savings of baby boomers who are primarily concentrating their investments in mainstream stocks and bonds, and primarily underinvested in anything that has any width of inflation-hedging.”

IMPORTANT - Rob is one of the most brilliant and original thinkers in the financial world today, which is why he oversees more than $150 billion.  In this powerful audio interview he warns KWN listeners what to expect going forward, as well as what investors can do to protect themselves.  The interview with Rob Arnott is available now and you can listen to it by CLICKING HERE. 

© 2013 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.

The audio interviews with Rob Arnott, Andrew Maguire, Art Cashin, Egon von Greyerz, Bill Fleckenstein, David Stockman, Robin Griffiths, Jim Grant, Gerald Celente, William Kaye, Dr. Paul Craig Roberts and Eric Sprott are available now. Also, other recent KWN interviews include Marc Faber and Felix Zulauf to listen CLICKING HERE.

Eric King

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