Jim Grant: "This Will Turn Out To Be Very Bad For Many People"

Tyler Durden's picture

Submitted by Christoph Gisiger via Finanz und Wirtschaft,

James Grant, Wall Street expert and editor of the investment newsletter «Grant’s Interest Rate Observer», warns of a crash in sovereign debt, is puzzled over the actions of the Swiss National Bank and bets on gold.


From multi-billion bond buying programs to negative interest rates and probably soon helicopter money: Around the globe, central bankers are experimenting with ever more extreme measures to stimulate the sluggish economy. This will end in tears, believes James Grant. The sharp thinking editor of the iconic Wall Street newsletter «Grant’s Interest Rate Observer» is one of the most ardent critics when it comes to super easy monetary policy. Highly proficient in financial history, Mr. Grant warns of today’s reckless hunt for yield and spots one of the biggest risks in government debt. He’s also scratching his head over the massive investments which the Swiss National Bank undertakes in the US stock market.

Jim, for more than three decades Grant’s has been observing interest rates. Is there anything left to be observed with rates this low?

Interest rates may be almost invisible but there is still plenty to observe. I observe that they are shrinking and that the shrinkage is causing a lot of turmoil because people in need of income are in full hot pursuit of what little of yields remains.

What are the consequences of that?

It reminds me of the great Victorian English journalist Walter Bagehot. He once said that John Law can stand anything but he can’t stand 2%, meaning that very low interest rates induced speculation and reckless investing and misallocation of capital. So I think Bagehot’s epigraph is very timely today.

John Law was mainly responsible for the great Mississippi bubble which caused a chaotic economic collapse in France in the early 18th century. How is the story going to end this time?

It will turn out to be very bad for many people. If Swiss insurance and reinsurance executives are reading this right now they might be rolling their eyes and they might be frustrated to hear an American scolding from a distance of 3000 miles about the risk of chasing yield. After all, if you’re in the business of matching long term liabilities with long term assets you have little choice but to wish for a better, more sensible world. But you have to take the world as it is and today’s world is barren of interest income. The fact is, that these are very risk fraught times.

Where do you see the biggest risks?

Sovereign debt is my nomination for the number one overvalued market around the world. You are earning nothing or less than nothing for the privilege of lending your money to a government that has pledged to depreciate the currency that you’re investing in. The central banks of the world are striving to achieve a rate of inflation of 2% or more and you are lending certainly at much less than 2% and in many  cases at less than nominal 0%. The experience of losing money is common in investing. But where is the certitude of loss even before your check clears? That’s the situation with sovereign debt right now.

On a worldwide basis, more than a third of sovereign debt is already yielding less than zero percent.

There is not quite a bestseller, but a very substantial book called «The History of Interest Rates». It was written by Sidney Homer and Richard Sylla. Sidney Homer is no longer with us, but Richard Sylla is alive and well at New York University. So I called him and said: « Richard, I’ve read many pages but not every single page in your book which traces the history of interest rates from 3000 BC to the present. Have you ever come across negative bond yields?» He said no and I thought that would be kind of a major news scoop: For the first time in at least 5000 years we have driven interest rates below the zero marker. I thought that was an exceptional piece of intelligence. But I notice however that nobody seems to have picked up on it.

It’s now already two years ago since the ECB was the first major central bank to introduce negative rates.

There are some other historical settings: In Europe, ??Monte dei Paschi di Siena, this 500 and plus year old bank in Italy, is struggling and as broke as you can be without being legally broke. Monte dei Paschi has survived for half a millennium and now it is on the ropes. Meanwhile, the Bank of England is doing things today that it has never done in its history which is 300 plus years. So I suggest that these are at least interesting times and in many respects unprecedented ones.

So what’s the true meaning of all this?

In finance, mostly nothing is ever new. Human behavior doesn’t change and money is a very old institution and so are our markets. Of course, techniques evolve, but mostly nothing is really new. However, with respect to interest rates and monetary policy we are truly breaking new ground.

Now central bankers are even talking openly about helicopter money. Will they really go for it?

I already hear the telltale of beating rotor blades in the sky. I also hear the tom-toms of fiscal policy being pounded. There seems to be some kind of a growing consensus that monetary policy has done what it can do and that what me must do now – so say the «wise ones» – is to tax and spend and spend and spend. That seems to be the new big idea in policy. In any case, it is not good for bondholders.

Interestingly, nobody seems to be talking about the growing government debt anymore. Also, budget politics are just a side note in the ongoing presidential elections.

The trouble with this election is that somebody has to win it. I have no use for Donald Trump but I have equally no use for Hillary Clinton. The point is that one of those two is going to win. That is the tragedy! So we at Grant’s regret that one of them is going to win.

The financial crisis and the weak economic recovery likely have spurred the rise of Donald Trump. Why isn’t the US economy in better shape after all those monetary programs?

I wonder how it would have been if markets had been allowed to clear and if prices had been allowed to find their own level in real estate in 2008. Central banks have intervened to quell financial panics for at least 200 years. For instance, in 1825 the bank of England lent without stint and was not – as they said – overnice about the kind of collateral. That was a very dramatic intervention. So it’s not as if we have never before seen the lender of last resort at work. But what is new is the medication of markets through this opiate of quantitative easing year after year after year following the financial crisis. I think that this kind of intervention has not only not worked but it has been very harmful. Around the world, the economies are not responding despite radical monetary measures. To some degree, I believe,  they are not recovering because of radical monetary measures.

What’s exactly the problem with the US economy?

There is another side of what we are seeing now: In America certainly the Federal Reserve and bank regulators generally are very heavy handed in their interventions. I’m sure they have every good intention. But with their regulatory charges they are suppressing the recovery in credit that takes place  in a normal economic recovery and in this particular case after a depression or after a liquidation.

Then again, a revisit of the financial crisis would be catastrophic.

The new rules with respect to financial reform have absorbed not only forests worth of paper but also the time and attention of legions of lawyers. If you talk to a banking executive what you hear is that the banks have been overwhelmed by the need to hire compliance and regulatory people. This is especially bearing on the smaller banks. I think that’s part of the story of the lackluster recovery: Monetary policy has been radically open in the creation of new credit. But it has been radically restrictive with regard to risk taking in the private world.

So what should be done to get the economy back on track?

There are guides in history on how to do this. For more than a hundred years in Britain, in the United States and probably as well in Switzerland, the owners of the equity of a bank themselves were responsible for the solvency of the bank. If the bank became impaired or insolvent they had to stump up more capital to pay off the liability holders, including the depositors. But over the past hundred years collective responsibility in banking has gradually replaced individual responsibility. The government, with the introduction of deposit insurance, new regulations and interventions has superseded the old doctrine of the responsibility of the owners of a property. That’s why I think we need to go away from government intervention and go more towards market oriented solutions such as the old doctrine of responsibility of the bank owners.

At least in the US, the Fed is trying to go back to a more normal monetary policy. Do you think Fed chief Janet Yellen will make the case for another rate hike at the Jackson Hole meeting next week?

Janet Yellen is by no means an impulsive person. According to the « Wall Street Journal», she arrives for a flight at the airport hours early – and that’s plural! So this is a most deliberative and risk averse person. Also, as a labor economist, she’s a most empathetic person. She believes what most interventionist minded economists believe: They have very little faith in the institution of markets and they don’t believe that the price mechanism is anything special. They want to normalize rates and yet they can always find an excuse for not doing so. We have been hearing for years now that the next time, the next quarter, the next fiscal year they will act. So I believe what I’m seeing: None of these days the Federal Funds Rate will go higher than 0.5%. I can’t see that happening.

Wall Street seems to think along the same lines. So far, many investors don’t take the renewed chatter of a rate hike too seriously.

The Fed is now hostage to Wall Street. If the stock market pulls back a few percent the Fed becomes frightened. In a way I suppose, the Fed is justified in that belief because it is responsible to a great degree for the elevation of financial asset values. Real estate cap rates are very low, price-earnings-ratios of stocks  are very high and interest rates are extremely low. One can’t be certain about cause and effect. But it seems to me that the central banks of the world are responsible for a great deal of this levitation in values. So perhaps they feel some responsibility for letting the world down easy in a bear market. It has come to a point where the Fed is virtually a hostage of the financial markets. When they sputter, let alone fall, the Fed frets and steps in.

Obviously, the financial markets like this cautious mindset of the Fed. Earlier this week, US stocks climbed to another record high.

Isn’t that a funny thing? The stock market is at record highs and the bond market is acting as if this were the Great Depression. Meanwhile, the Swiss National Bank is buying a great deal of American equity.

Indeed, according to the latest SEC filings the SNB’s portfolio of US stocks has grown to more than $60 billion.

Yes, they own a lot of everything. Let us consider how they get the money for that: They create Swiss francs from the thin alpine air where the Swiss money grows. Then they buy Euros and translate them into Dollars. So far nobody’s raised a sweat. All this is done with a tab of a computer key. And then the SNB calls its friendly broker – I guess UBS – and buys the ears off of the US stock exchange. All of it with money that didn’t exist. That too, is something a little bit new.

Other central banks, too, have become big buyers in the global securities markets. Basically, it all started with the QE-programs of the Federal Reserve.

It is a truism that central banks do this. They’ve done this of course for generations. But there is something especially vivid about the Swiss National Bank’s purchases of billions of Dollars of American equity. These are actual profit making, substantial corporations in the S&P 500. So the SNB is piling up big positions in them with money that really comes from nothing. That’s a little bit of an existential head scratcher, isn’t?

So what are investors supposed to do in these bizarre financial markets?

I’m very bullish on gold and I’m very bullish on gold mining shares. That’s because I think that the world will lose faith in the PhD standard in monetary management. Gold is by no means the best investment. Gold is money and money is sterile, as Aristotle would remind us. It does not pay dividends or earn income. So keep in mind that gold is not a conventional investment. That’s why I don’t want to suggest that it is the one and only thing that people should have their money in. But to me, gold is a very timely way to invest in monetary disorder.

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doctor10's picture

what we are all witnessing is the end of usury banking. In that sense, it may well be that after 15 years of open struggle, Sharia Law may have prevailed in this venue.

KickIce's picture

Next up is complete Sharia law, and yes, since the bankers own everything thing they won't have to resort to usury.

BaBaBouy's picture

GOLD / SILVER Down-ed ~~~ Again ~~~

NOTHING Works Like Fucking With The POG...

BIS Gotts things under Cuntrol ~~~

InTheLandOfTheBlind's picture

Anti usurary laws arent just sharia based... They are also biblical, which was written well before the koran

nuubee's picture

Usury can't be legislated against any more than gravity can. Anyone taking a risk with their accumulated assets will demand terms favorable to them.

KickIce's picture

I call BS, just look at all the thriving economies in the Middle East.  They're just immigrating to the West to share their respective cultures and iving us doctors and engineers as a bonus.


Or am I watching too much MSM?

ali_baba's picture

Younger generation aint gonna do shit!

We didnt do anything even tho we saw this shit coming. It's true that they will be poorer in the system than we ever were and hence angrier.... but we've, presciently, given away our rights to the system PLUS, look at the way kids are brought up these days; all pampered and shit.

Basically, we've robbed them of everything our ancestors fought for us to have. Now they're just meat for the tribe to grind.

Gaius Frakkin' Baltar's picture

Put another way, people have not been so collectively dumb since at least 3000BC.

The Alarmist's picture

Grant is being too conventional in his thinking.  The CBs will continue doing QE and monetising mountains of sovereign debt until TPTB decide it is time to stop the music.  Then the CBs will fold and their member banks will do the mother of all bail ins to pay for the party.  If you have any money left after that, the governments of the world will grab it to bail out what is left of the banking system.  At the end of the day we will all be returned to our rightful places as serfs.

Lather, rinse repeat.

GRDguy's picture

Well said. The old 1889 book "The Great Red Dragon: Foreign Money Power In The United States" stated that the banksters' "goal is to own the earth in fee-simple."  Grant was kind enough it illustrate how the banksters are going to do it.  When they have enough (as if that could ever really happen) they will stop buying assets with thin-air money. There would no longer be a market for those assets (who had any money left), and since nobody would be able to pay off their loans, TITLE would accrue to the holder. Legally. The banksters' wet dream finalized.

Shizzmoney's picture

younger people need to understand, you can't "vote" for freedom and to ask a ruling class that defrauds the lower classes left and right to arrest those responsible for the mess we are in.  

Freedom always got an A.K:


max2205's picture

indexes are going up 4EVA

Infocat's picture

Indeed, its what has helped our entire economy to develope! http://www.truthjustice.net/

SilverSphinx's picture

usury: an unconscionable or exorbitant rate or amount of interest


of course it can be outlawed

Hail Spode's picture

You are correct, but compounding interest need not be, and mostly should not be, among those terms. It could be done in the form of a re-purchase agreement, where the bank buys the house and you agree to buy it from them for a certain number of payments over a certain amount of time. They would make a profit on the sale, but not at compounding interest. Or in commerical loans the bank would be a partner in the enterprise until they were bought out on certain terms.  What banks are allowed to do now- compounding interest to people who can't pay it back because they only keep the loan two weeks anyway- is not working. The world is being crushed under compound interest from debt, even at low interest levels. All the wealth in the world is accumulating to the lenders. It turns out God was right about interest. 

Multi's picture

Lenders should be free to lend their money in the terms they please, as  you should be free to reject those terms. Period.

Anyway, so you are against compound interests? So if you deposit $10,000 in a bank, the bank should always pay you the interest of those $10,000 in month one, and in month two, ... and ten years from now, no matter how much interest benefits you have accrued in your account ($12,000? $13,000? $14,000?). The bank should be still paying interest over a capital of initial $10,000, right? that sounds fair to you?

Hail Spode's picture

I once thought so as well. I adjusted my thinking due to the data. I may reject a 30 year mortgage as a dump idea, but when others take those terms they drive the cost of housing up. The first group in gets a house they otherwise could not afford, but after a while the effect is people are just paying more for houses. That is just one issue. There are many destructive effects from allowing compound interest in an economy. They add up to precisely what we have seen - over time the bankers own everything and the rest of us own nothing. After 55 years I guess I realized that we were not smarter than God after all, and our neat little ideas are too simplistic to prevent such outcomes.

As for the bank situation, they should pay me a share of their profits, if it is that sort of account. If I want a safer version of an account, they should pay me nothing. They would get paid every time I used their debit card for a transaction.


CNONC's picture

Definitions can be slippery.  Usury is generally seen as lending at interest.  Compensation for risk is never usury.  In biblical terms, lending at interest to poor people is never allowed, lending at interest for consumption is never allowed, but business investment is clearly allowed.  According to my understanding, what is probably not allowed are things like modern mortgage or small business lending, where an ironclad personal guarantee is required.  If you lend me money for a business venture, and that venture fails despite my best efforts, your money is lost without recourse.  But if it succeeds, you are repaid with a preset level of compensation.  It is the recourse feature, and the explicit definition of time terms for that compensation, of modern lending that makes it improper. The difference between equity and debt, under these terms, is the explicit right of the borrower to redeem his full ownership by repaying the principle.  

Again, my current understanding.  Not sure if I'm right.  

Multi's picture

Generally, usury is not lending at interest, usury is lending in abusive terms (e.g. abusive interest rate as in too high). Usury, in my opinion, is an idiotic term because who gets to define when the terms are abusive or not? that's subjective, what may be abusive to you it may not be for me.

I don't know what the biblical term for lending at no interest to poor people or for consumption is, but in common parlance the term is 'mongolism'. Because you have to be a mongoloid to lend (risk) money without expecting a benefit in return.

Which brings us to your second point, the level of risk in lending will determine the interest rate to pay. Guarantees (like the property of a mortgage) reduce the level of risk (of losing the principal) the lender takes, hence a smaller interest rate is required from the borrower. Therefore, you should pay less in interests from your $500,000 mortgage than if you took an unsecured loan for the same amount of money. That of course assuming you didn't cite one of your biblical quotes, in which case the lender assumes you suffer from said mongolism and tries to charge the same interest rate, or one even higher depending in how many quotes you cited.


SoilMyselfRotten's picture

Indeed, according to the latest SEC filings the SNB’s portfolio of US stocks has grown to more than $60 billion.


Are they also conjuring money out of thin air to buy assets as we know the Fed is? I dont think they care if there is an economic meltdown because at some point they are going to own the lions share of all markets around the world(if not already)

jaxville's picture

 The thing is that SNB buying is buoying confidence in the US equity market. What if the SNB needs US dollars at some point down the road?  How can they ever sell any of those shares without erasing a huge pile of (misplaced) confidence?


The Real Tony's picture

That's about 45 billion down the toilet bowl. They'll learn what happens when you pay 4 times what something is worth.

SoilMyselfRotten's picture

Agreed, but when you are paying 4X for something with counterfeit/ficticious money, it's not such a bad deal

RockySpears's picture

Errrr,   Yeah.

"They create Swiss francs from the thin alpine air where the Swiss money grows. Then they buy Euros and translate them into Dollars. So far nobody’s raised a sweat."



CPL's picture

People other than grunts.  Non-comm civilians.  Plebs.  Sheep.  Meat.

Things that go bump's picture

It is an aconym for a lot of things, but in this case it means the price of gold.

Things that go bump's picture

The Koran was based on the Bible. Mohammed just tweeked it a bit. 

Rabbi Chaim Cohen's picture

Initally yes, he claimed to be a direct decendent of Ishmael who was given a promise by God. However, Mohmmad demanded to be accepted as a latter-day prophet to the Jews but the rabbis of the day refused to accept the new commandments he claimed were from God but violated the laws they knew from the Bible.

At that point the Qur'an was incomplete and his rejection by the Jews turned the tenor of its writing against the Christians and Jews whom it first hailed a the People of the Book. After Mohammad's death the original Qur'an was compiled by the first Kaliph, Abu Bakr, but no one really knows how he decided what all was in it. The history of the book is storied and conflicted with different parties telling different accounts including more than one case of orders to burning all copies other than ones that a particular muslim Kaliph ordained as proper.

Personally, I see the whole thing as the legacy of another single person claiming a new amazing revelation from The Creator just like Paul, Buddha, Lord Krishna, Joseph Smith etc. No one can refute or substantiate any of their claims except themselves.

Absolute Truth's picture

"No one can refute or substantiate any of their claims except themselves."

Isn't truth itself exclusive or is all truth relative?

WorkingFool's picture

Truth is absolute. Understanding is relative. Without transparency the varacity of a claim cannot be determined - unless your a DemocRAT of course.  

SuperCycleBear's picture

I believe the truth is fundamentally a matter of personal experience about what we can know and faith for what we cannot know. Our folly is thinking truth is fundamentally about fact but what we know (and even can know?) is but a speck in the whole Truth. Faith plays a huge role, but many in the West shy away from such a worldview.

Kantaka's picture

The Buddha never claimed a revelation from the creator.

GRDguy's picture

The root of the whole problem is that Abraham lied.  Others did, too. Even ol' Joe Smith (LDS) caught that and copied the idea with a different slant. If only folks would understand the word "sociopath," they wouldn't be so easily manipulated.

Rusty Shorts's picture
Mark Twain's "Letters from the Earth" -- Satan's Letter



Yukon Cornholius's picture

Very true indeed. The only time Hey-Zeus used violence was in driving the usurers from temple.

Libtard's picture

Islam is a product of the Roman Catholic Church and the Jesuits.

white horse's picture

Maybe, you should write a book on it.

gmrpeabody's picture

Libtard..., that is a very good name for you.

TheABaum's picture

Hey dimwit, the Jesuits weren't around until the mid of the 16th century. Islam was already 9 centuries old.


If it wasn't for Catholics like Charles Martel and Jan Sobieski, Islam would have conquered Europe a long, long time ago.


Sometimes it's better remain silent and be thought a fool, then to write and remove all doubt.


Infocat's picture

Usury is not the problem, the fiat money scam is! http://www.truthjustice.net/

Scuba Steve's picture

By definition, yes Usury is a problem .... especially when the strong-armed lender puts a borrower into a neat little box and says what usury he'll be entitled to.

Receiving Interest on borrowed money is not a problem.


Pie rre's picture

I think even Hebrews aren't supposed to promote usury except with the Goy.

Infocat's picture

Its downed now, but all that means is you have one more buying opportunity! http://www.truthjustice.net/

ZH Snob's picture

even if we the people never get to use gold or silver as currency, you can bet that its value will still correlate to all the fiat ever created.  nations, cb's and corporations will find it is the only surety to measure and settle all the debt resulting from its creation.

debt will become repulsive; credit will be desperately sought and the only remedy will be silver and gold.