March 22, 2013

Fed Critic James Grant on QE Policy

As the markets lick their wounds today, investors can take some comfort that federal reserve chairman ben bernanke is not going to wind down his stimulus plan until he's convinced that the jobs market is back on solid ground. right call? wrong call? when will the call be made? we've got jim grant with me here. good to see you, jim. nice to be here. i think i know what you're going to say about the call that the fed has been making in terms of keeping this stimulus in place. bad call. correct. okay. you say it's because of the fed's policies that we're seeing this long, drawn-out recovery.explain. all right, well, a very smart reader of ours named matthewclerc in chicago says, positive real interest rates above the rate of inflation are kind of like a shot clock in basketball. so march madness themed. you can't just stall in professional basketball and college financial. you have 24 seconds to shoot or 35 seconds. in any case, there's a to become clicking. and matthew compares the clicking clock in a basketball game to the function ofpositive, real interest rates. real interest rates, when they are above the rate of inflation, force people to do something with cash, with liquidity. when interest rates are negligible or below the rate ofinflation, people can sit there and do nothing. notice our federal government. there's no pressure, really, to balance the budget, no pressure to wind down these immense deficits, because they can be financed at about nothing. so to companies that might properly be considered bankruptcy candidates can sustain themselves and their precarious lives through borrowing at such rates. and that's what we continue seeing. this so-called recovery has been painfully and in a very un-american way drawn out, undynamic, and to people who are looking for a job, downright cool. and the fed insists that for reasons of economics as well as humanity, it will continue to do what has not worked. and i want to get your take on cyprus and europe, but let me put that aside for a moment.because, you know, chairman ben bernanke commented on thisyesterday. someone said to him, what about the downside risk of all of this easy money. and he said, look, there are no issues of inflation. we don't have any issues in terms of, you know, this freemoney so far. and in fact, it's been helpful to the economy. so, what is the downside risk? how does this end? well, this is the greatest and most perilous experiment in the history of paper money. every central bank in the world is doing approximately what the fed is doing. every central banker in the world, of any consequence, thinks what chairman bernanke thinks. they all have the same model, the same outlook, the same conceit about what they can know. the people who run the fed did not see the most obvious and disastrous excesses of credit and residential real estate when they were struck between the eyes with these excesses. now, chairman bernanke seems to sleep well. he has the most astonishing degree of serenity on his face, but insists he can see into the future and approve it before it happens with these policies. he can't. and by his actions, he has proven he can't. so how does this end? what are you expecting? how does this play out in the coming -- let's say he starts moving on interest rates, i don't know, 2014? a lot of people think he'll start unwinding this at the end of this year. well, these revolutions, and this is truly a revolution in the thinking about money and monetary policy, they devour their children. he's not the most radical voice, there are others coming forward and saying, let's not start with zero percent rates, we can target nominal gdp, do all these things. this will end in immense inflation, in immense destruction of wealth. when, i certainly don't know. but that is certainly, i think, i think the outcome. is the 6.5% unemployment rate the right thing to target?no. i mean, the fed -- i mean, okay, if you have a pizza and youdivide it not into 12 pieces, but into 36, is the anyone going to be happier? will there be more food on the table? what we are led to believe about money is more better. the more they print, the morewealthy we become. but it's not that simple, maria. the pie is at least in the context of american dynamism, the context of enterprise, the pie wonderfully grows. that is the fruit of enterprise.what we are seeing is the suppression of enterprise through the manipulation of markets. okay, you asked about my marchbrackets. here's my march brackets. in the finals, mr. market beats mr. bernanke. that's my call. i'm sticking to it. when you say bes mr. bernanke, how does it beat mr. bernanke? the market is going to have the last word. the fed is in the business ofsuppressing prices and manipulating prices. because it's a price control. the fed won't say that, but that truly is what it's about. and i say that markets will have the last word. that prices will finally escape from this prison into which the fed has thrust them. i get it, i get it. you're talking my language now. now i get it. let me ask you about what you wrote in the newsletter this week, about the problems this month and the problems in cyprus cannot be contained, you wrote. so are you anticipating another country to suffer the same fate as cyprus? how does the cyprus newsdevelop? the importance of the cyprus news is an idea. and that idea is that to the authorities, your money is not necessarily yours, if it is needed for the good of the state. right? so, in a pinch, what has been demonstrated in cyprus is that there will be an event over the weekend, it seems over the weekend, there will be capitalcontrols. there will be this orwellian and truly chilling phrase, astability contribution. a contribution, mind you. so i think that idea is now out, and it cannot easily be put back. and people ought to take the measure of this. they don't take seriously the discussion or monetary bureaucrats about the necessity of capital controls. take seriously the fact that the bureaucrats in brussels cooked up this scheme and impose it on a saturday morning. i mean, these are very chilling facts. very scary. yeah. very scary, what's going onthere. i guess, you know, the europe story, there aren't anysolutions yet. we keep hoping for something to break in europe, and it's still a very, very tough situation. so if i don't want take thedirection of the federal reserve and put my money into stocks an.

James Grant originated the "Current Yield" column in Barron's before founding Grant's Interest Rate Observer in 1983. He is the author of five books, one of which is Mr. Market Miscalculates (Axios Press, 2008).