On the new QE, sterilized: “By pressing down interest rates, by repressing interest rates, the Fed is in effect dulling the risk sensors of the entire marketplace. Is this good?”
Central planning: JG: I think zero is the wrong rate for almost any economy. The Fed embarked on a vast experiment in moral hazard. Interest rates are the traffic signals in a market economy, and everything’s green. … You have to wonder whether these interest rates are the right clearing rate or rather they are the imposition of a central bank.”
The great depression: “Can we talk about what happened in early 1920s? Ben Bernanke can’t stop talking about the ’30s. But in 1920, ’21, the economy fell off the cliff. Nominal GDP was down 29%, wholesale prices collapsed by 40%. You know how the Fed and the Treasury reacted to this? The Treasury balanced the budget and the Fed actually raised interest rates. Guess what, the depression ended. We keep on hearing this propagandandistic drum beat assertion that in order to get us out of our sorrows, the authorities, they, the high and mighty ones, must run immense deficits, they must cut interest rates to the bone, they must starve savers. How do they know that? They can’t know that. They assert that. But there’s a real living historical example of the early 20’s having them do the exact opposite. And yet that depression, which featured 14% unemployment at the lows ended, and within a year the unemployment rate was back to 3%. Today, 20-somethings are desperate for an economy that does something besides sit there and slumber.
Maria Bartiromo: “What are the alternatives?”
Jim Grant: “Capitalism is an alternative for what we have now. I highly recommend it.”
Maria: “We all do.”
Grant: “No we don’t.”
Maria: “The Federal Reserve may not.”
Grant: “We ought to be discussing an intelligent move to a sound currency by which i mean a currency that is based on a standard and not at the whim and the discretion of a bunch of mandarins sitting around Washington D.C.”
Longer dated bonds backed by gold.
MB: In the latest grant interest rate observer, in terms of the inflationary story, we’ve been talking about the threat of inflation after a long time with this easy money. I want to get into the ECB as well, because it’s not just the Fed. Have we seen inflation yet?
JG: There’s inflation certainly in spots. Obviously commodity inflation. But there’s also inflation, I think, in market assets that are stimulated, to use that favorite word of the authorities,stimulated by ultra-low interest rates. For example, in the distressed debt markets, you’ll find companies that have not made a profit in five years, issuing debt, as if this company were somehow soundly and demonstrably solvent. By pressing down interest rates, by repressing interest rates, the fed is in effect dulling the risk sensors of the entire marketplace. Is this good?
MB: It’s the question to ask, Kelly. And the reason so many people are focused on the drawback of these record low interest rates and the fact that it’s also punishing savers. I’m curious, it may not amount to anything, but Jim, if the fed goes this route of sterilizing its quantitative easing, and if they do another round, what does that mean to you?
JG: Why would they pursue that kind of act lend long, in other words. which is in the private sector, a great way to go broke, as a bank. the fed is going to do this. it thinks — the wall street journal is floating this balloon. The fed doesn’t want to have us believe that it is recklessly printing money to do that, ergo the gambit of locking up the funds with which this buys the bonds. kelly, it looks like nothing more than what we’ve seen. it’s the fed interposing itself between the marketplace and –
Kelly: Jim, it’s an overture to people like you who think the feds are creating inflation.do you read a message like that and feel comforted somehow that…
JG: No, I am distinctly uncomforted, Kelly. the fed is creating, if not inflation, it is creating disportions. what has the fed got against the price mechanism? it’s got in this country a long way over 200 years, suddenly, wherever the market sells off, we somehow have to have a fed interjection of money.
MB: What about the ECB? We’ve got the ecb allowing a three-year period where the banks can pay back the lending. what are they doing with that money? They’re actually buying sovereign debt. Longer term, what about the ECBaction?
JG: the ECB is going through akind of adolescent growth spurt. its balance sheet is positivelyexploding. its balance sheet is the equivalent of $4 trillion. it’s one-third larger than the fed’s. although the eurozone has aneconomy about 13% or 15% smaller than ours. the fed is a piker compared to what the ECB has recently been doing. I think the point is, the world over we’re seeing unprecedented things.we’re seeing interest rates that are lower than ever, and central banks that have never been more recklessly pro-creative, to use Warren Buffet’s words, about assets. They’re printing money like mad and people can’t seem to get enough long-term bonds, because the central banks are manipulating expectations about the future of interest rates. i think it’s all very dangerous.we can draw lessons from the depression of the 1920s, butwhat are the actual consequences of this continued government intervention?