Submitted by Taps Coogan on the 8th of January 2019 to The Sounding Line.

James Grant, of Grant’s Interest Rate Observer, recently spoke with CNBC about the state of markets and the difficulty of forecasting the future in an era which has, according to him, “no precedent.”

James Grant:

“I think that people are too certain about things about which they should not be certain. The future is a closed book to begin with and… we are in a moment that literally has no precedent. Almost everything in finance has been seen before. What is new and different (now) is the following: We have $8.5 trillion of securities priced to yield less than zero worldwide. At no point in the Treasury yield curve is an investor earning greater than zero after inflation and taxes. Interest rates, by one measure in 2016…, were the lowest they had been in four or five hundred years. So we are in an environment of extraordinarily accomodative (monetary policy), essentially free capital. We’ve been in an era of essentially free money for many years. Free money is lovely, but in spending it, people will do things they wouldn’t have done had that capital cost something substantial…”

“The future is not the Fed’s best subject, nor is it humanity’s best subject, yet we sit around here listening to people telling us what’s going to happen in March. Is it going to rain next Tuesday? So I would say we don’t know a lot and…, in view of these most extraordinary circumstances…, we ought to be prepared for all manner of outcomes, many of which are unscripted…”

“I think the Fed’s balance sheet ought to be much smaller than it is, but having said that…, we ought not to underestimate the possible consequences of normalization. This economy is capitalized for ultra-low interest rates… A 100 basis point cost (1% increase) in the federal borrowing is going to cost the taxpayers a $160-odd-billion a year…”

“The leading indicator of inflation in the early ’60s were rates of inflation of less than 2%, often less than 1%, in succession for about four or five years…, and then suddenly the world changed. Later (historians) said the failed anchovy harvest off Peru, or the Federal Reserve’s mismanagement of its interest rate during the Vietnam war, or a demographic shift… Inflation, or changes in the prices level, often come as surprises… I think we live in an age of inflation… We will look back on this as a period in which inflation was building. and one day inflation will be a ponderable number, say 4%, and this could happen in the next couple of years, and 4% in this environment would be a very disturbing thing.”

There is more to the interview, so enjoy it above.

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