WITH NARY a glimmer of hope that economic sense will supplant political expedience, Stansberry & Associates founder Porter Stansberry expects rampant inflation to roar in once the cost of capital rises. 

Stansberry tells The Gold Report he continues to buy and hold gold in preparation, and discusses another investment vehicle he has been pursuing. 

The Gold Report: Not a day goes by that we don't hear or read something about the fiscal cliff. To what extent are you worried about the fiscal cliff? Or do you foresee a resolution?

Porter Stansberry: You can be sure of a couple of things from Washington. One is spending will not slow down. The increase to spending in 2013, 2014, 2015 will be the same kind of increases we have seen in previous years. We will continue to spend 24% of GDP at the federal level. 

TGR: And what else can we be sure about?

Porter Stansberry: Some actions will be taken to increase the tax rates on some taxpayers, but they will produce no material change in revenue. The government will continue to take in far less than 20% of GDP in taxes, probably only 16% or 17% of GDP. Further, those changes also will narrow the tax base, which is to say that fewer people will be asked to pay more in taxes.

Those two things—more spending and higher tax rates for some taxpayers—will happen because they're the only politically expedient things that can happen. That's been driving politics and the budget since 30, 40 years ago, and will continue to do so because voters demand more from the government and voters demand that they not pay. That will continue until the system completely collapses.

TGR: The fiscal cliff was set up a couple of years ago in theory to force Congress to do something. There's a lot of fear about it, but at what point will there be enough fear that voters say we can't proceed in this fashion anymore?

Porter Stansberry: People should fear not going over the cliff. If we go over the cliff, the tax base will greatly expand. The payroll tax cuts will be done away with and the broad middle class—the people who have benefited from the tax cuts—actually will have to pay taxes again in America. There's no other way to generate the amount of revenue that is required. You cannot finance the federal government on the backs of the top 5% of wage earners because even if you charge them 100%, it wouldn't come close to being enough money.

Right now the US takes in something on the order of $1.5 trillion (T) a year in income taxes, but we have an annual deficit of $1.6T. Even doubling the amount of income tax collected would leave a deficit. 

Taxing the rich cannot solve this problem. It can be solved only by freezing spending and broadening the tax base. That will never happen because it's unacceptable politically.

TGR: Eventually something will happen.

Porter Stansberry: Yes, it will. Our trading partners and the people who finance our debt finally will say, "We're not doing this anymore." But look at the Treasury bond market. It's not happening yet. 

TGR: It's amazing that the US hasn't been downgraded just on the basis of all the political bickering.

Porter Stansberry: That's partly because the Federal Reserve keeps buying up all the excess Treasuries. People have no idea how dangerous this is, but they will find out when inflation goes crazy. Another big reason is that there's not a really viable alternative. What would the Russian Central Bank or the Chinese Central Bank do with their trade surplus? Buy British paper money? Or European paper money? Where's the hard Dollar alternative? There isn't one. No government-backed money is any more secure than the Dollar. Even the Swiss have turned on the printing presses to equalize exchange rates with the Europeans. There's nowhere to go. That's why these central banks are buying all the gold they can get. And that's why gold prices are going to absolutely go higher.

TGR: China particularly has been buying a lot more natural resources such as copper or iron ore. 

Porter Stansberry: I have been following the strategic buying of the Chinese and you're right, it has been buying up lots of resources, especially in Canada. That will continue for sure, but it is also buying lots and lots of gold. I think Russia and China have been neck and neck in gold purchases since the 2008 crisis, spending almost half of their current account surpluses on gold every year.

Some folks have been critical of my prediction that the US will lose its world reserve currency status, but I think it has already happened. When two of the world's largest economies would rather buy gold than Treasury bonds, you've got a big problem.

TGR: When do you suppose the gold price will start climbing again?

Porter Stansberry: I don't have any timetable. I can just tell you that I haven't sold any of my gold and I won't until there is a gold-backed, well-financed national currency that offers me a reasonable yield for the risk I take to finance the government. There's nothing like that in the world and I don't see any prospects like that.

TGR: The last time we chatted, you discussed the pros and cons of returning to the gold standard. One of your observations was that the US Dollar has lost something like 20% of its value since 2008 and you projected it losing another 20% in 12 months. Do you still see the Dollar value decreasing at that rate?

Porter Stansberry: I actually think it is but it's not reflected yet in consumer prices. Manipulating the bond market is so greatly reducing the cost of capital that so far companies have been able to maintain profit margins without raising prices. As a result, we've been exchanging capital cost for commodity costs but you can only do that for so long.

Imagine what your purchasing power would be if you're going to go buy a new home today. If you have $10,000 for a down payment, you could buy a $100,000 home with an FHA mortgage, and you'd only pay something like 3% for the mortgage. But could you afford that if mortgage rates were actually market set? If you had to pay 7.5%? No. Your purchasing power, your standard of living, would be completely destroyed without reasonably priced financing, and that's absolutely what will happen. 

Look at other markets. Imagine what electricity companies would charge for turbines, light bulbs and appliances if it had to pay a market rate of 9% on their debt. The price of capital is so low that it is retarding the impact of ongoing inflation, but sooner or later all this debt will have to be financed at real prices. When that happens, the impact to the economy will be both a weaker Dollar and higher prices for everything.

TGR: But you are making it sound as if the actual financing costs now are artificially low. When interest rates increase, wouldn't it be more like 4% than 9%?

Porter Stansberry: Look historically what high-yield debt has traded for—9% isn't even aggressive. Over the last 20 years, I think average yield on a high-yield bond has been 14%. 

TGR: So many large companies have a tremendous amount of cash on the balance sheets. They could double their interest payments.

Porter Stansberry: The game can't go on forever, and the minute the game ends it's going to end badly. The shock to the consumer will be amazing. It's not just inflation devaluing the purchasing power of wages, which is going on continuously. It's going to be that suddenly consumers will have this huge price impact. It could reduce the purchasing power of the average consumer by 20% or 30%.

TGR: The way you're explaining it, it sounds as if it could happen almost overnight.

Porter Stansberry: It will be extremely quick. Nothing particular changed in Greece, Italy or Spain between 2006 and 2009. No significant catalyst caused people to all of a sudden wake up and realize these sovereigns were bankrupt. They've been bankrupt for decades. All that changed was the realization that others were unlikely to continue to finance them. One investor buys the bonds because he's convinced the next investor will do so, but that's all based on faith. There's no real critical thinking going on. All of a sudden, if some investor loses faith, it can happen very quickly.

TGR: Isn't playing the markets all about faith and what you think the general population is going to do? Markets aren't always based on fundamental economics. They're based on fear and greed.

Porter Stansberry: Of course they are, but with the Fed skewing the bond market the way it has, people have become convinced that the yields will always go lower because the Fed will not let them increase. So far that's been a great trade, but you cannot print your way to prosperity. Sooner or later these policies will destroy the credit of the United States and send interest rates soaring in our domestic economy. That will absolutely happen, no doubt about it.

TGR: Aren't the Europeans—even the Chinese—in the same game of artificially low interest rates?

Porter Stansberry: China's not in the same game, nor is Europe to the extent that the US is. Germany has been very reluctant to monetize the European debt. It has certainly increased that greatly this year so maybe there will be runaway printing, but paper money has always been this way. Show me the paper currency that lasted for more than 100 years and was worth anything at the end. Paper money gives human beings the illusion that they can get something for nothing. They believe in it until it falls apart.

TGR: Until we get to a gold standard, we as investors need to be doing something to retain our wealth. You can put a certain amount in gold, which some people are doing, but we also have other types of investments, which for people in the US is based in US Dollars. Until it unravels, isn't the US Dollar the best bet?

Porter Stansberry: Yes. I think that's fair. But it doesn't mean anything to me because it's similar to going on death row and asking who is the best guy.

TGR: But we're looking at an unfortunate situation where individuals need to put their money at risk in equities or the bond market at this point.

Porter Stansberry: I disagree. I don't believe people have to put their money into bond markets or stock markets. For the last 24 months I've been buying real estate almost exclusively. I might have bought a couple of small gold stocks along the way but miniscule positions compared to my net worth. 

I've been buying real estate because it's an asset I can control, that I could finance extremely cheaply if I chose to. I do not choose to; I buy my real estate in cash. I'm not interested in making money on it. I just want to keep my money safe. I'm happy to make returns of 4% to 6% a year on my real estate portfolio. If inflation comes along I'll be able to increase rent and have capital appreciation roughly in line with inflation. For me that's all there is.

I do believe we're still in a global finance crisis. Things are not right with the world. In a situation like this, I think your goal as an investor should be to keep what you've got. It's going to be very difficult to survive this with your wealth intact because so many forces are aligned against you. I just button up and I'm super-conservative.

By buying off the bottom in the real estate markets, I'm doing the best I can to protect myself from any future calamity. Time will tell whether it will work. And if there's just ongoing inflation instead of a calamity, I'm going to make a lot of money with my real estate.

TGR: Absolutely. Any other insights you'd like to give to our readers of The Gold Report?

Porter Stansberry: I'll continue to buy gold on a regular basis and I've never sold a single ounce. So if you're buying gold I think you're going to do very well. And I will continue to be cautious. I don't believe it is a time to be aggressive, especially in the bond markets around the world.

TGR: Thank you very much, Porter. Have a happy—and I hope prosperous—New Year.