Jim Grant has long been skeptical of the mechanization of the Federal Reserve. He was warning about the distortions created in the markets and broader economy caused by the central bank’s monetary policy long before the monetary Hail Mary it threw up in response to the coronavirus pandemic.
Last month, Grant wrote an op-ed for the Wall Street Journal headlined, “Powell Has Become the Fed’s Dr. Feelgood,” and he recently appeared on Fox Business to talk more about how the Fed is further distorting an already distorted economy.
In the WSJ piece, Grant asserts that the Fed’s zero interest rate monetary policy is hopelessly distorting the economy and policymakers, Powell in particular, should find a bit of humility.
Ground-scraping interest rates turn savers into speculators and quarantined millennials into day traders. They facilitate overborrowing, suppress market signals, misdirect investment dollars and promote the dubious business of turning well-financed public companies into heavily indebted private ones. Concerning the future and its side effects, Mr. Powell should admit how little he knows — he and the rest of us.”
Conventional wisdom holds that given the economic shutdowns, the central bank had to “do something.” Grant takes a position similar to Peter Schiff who has said the Fed policy isn’t helping and it’s actually hurting. During his Fox Business interview, Grant said it was doomed from the start.
The Fed faced kind of an insuperable difficulty, right? Without revenue, things don’t work. And there is no kind of monetary policy that is designed to supplant the absence of commerce. That’s what they faced in March.”
The Fed may have acted with good intentions, but as Grant put it, investors aren’t really concerned with “motives or necessity.” All that really matters is outcomes. The outcomes won’t be good.
So, what does all this mean?
It means a uniquely aggressive monetary stance. It means interest rates no longer are prices that reliably direct investment flows and valuations. Interest rates are the artificial constructs of the Fed that is doing its best to step in and make something happen in the absence of economic activity as we used to know it. So, interest rates distort judgments and flows. And the amount of money that the Fed has created is itself a distorting factor.”
Peter has been warning about a dollar crash and looming inflation for months. Grant expressed concern as well.
The Fed wants us to believe that we should believe that there will be no inflation out of all this and to me that is a vast unknown. We have America’s fasted peacetime money-growth coexisting with the all-time 4,000-year record lows in interest rates. It’s a most curious and troubling juxtaposition there.”
Grant said aggressive moves by governments and central banks are unwise.
I think what we have is a monetary moment that is unprecedented and therefore calls for extreme caution and great humility on the parts of all of us.”
Grant pointed out that commodity prices are at their lowest level compared to the Dow in about 120 years.
That, to me, kind of lights a light. It reminds us that there may be an extreme valuation out there that might be inviting capital rather than thought to be repelling it.”
Grant said that he is “confidently bullish” on precious metals.
We feel that they are an alternative to what is happening in equities and in bonds.”
You can watch the interview HERE.