Today the man who oversees more than $150 billion warned King World News about the high likelihood of a coming great inflation, or worse yet the possibility of a hyperinflationary collapse. Rob Arnott, who has won an unprecedented six Graham & Dodd Awards and is also Chairman of Research Affiliates, also warned KWN about the dangers of what the Fed and other central planners are engaging in as they lead us into a reckless and potentially game-ending and destructive “Hyper-Keynes” policy.
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.’”