Taps Coogan – June 15h, 2020

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Grant’s Interest Rate Observer founder and editor, Jim Grant, recently spoke with CNBC about the Fed’s ever more radical monetary interventions and why he thinks investors may someday come to see the Fed as an hindrance, not a friend.

 

Some excerpts from Jim Grant:

“With every moment of crisis or difficulty, central banks weigh in with lower rates, and bigger balance sheets, and more interventions of all kind. So, what we see now is certainly unique, but it is… not unprecedented… The Chairman talks about the smooth functioning of markets, but markets are not meant necessarily to be smooth. They are meant to discount future cash flows and to express the best guess of the collective group of investors about the risk of default and impairment of credit, and what the central banks have done is deaden those sensors. Junk bond spreads are back… to slightly below average for the last 10 or 20 years or so… which is astonishing given the state of things in the real world. So, I would say that central banks have been instrumental in making markets less perceptive and making them tell us less in the moment about how things are…”

“Interest rates have been falling for (almost) 39 years… The moment of truth (for confidence in the Fed), I think we’ll see it in a number of possible ways. One is if there is an unscripted rise in price inflation. Most everyone doubts that’s possible… But you know, if you look at the rates of growth in various aggregates of the money supply over the past year, you’re looking at 15%-20% year-over-year and higher, never higher rates of broad money growth in peacetime than at the present moment. The Fed’s balance sheet has shown 80% or so year-over-year growth. Annualize that and it’s now 700%…”

“Radical policy begets more radical policy, which begets more leverage, more frailty, a greater propensity to intervene next time…”

Even absent a rise in inflation, the Fed led ‘Japanification’ of the US economy and markets aught to have people just as worried about the moral hazard of endless stimulus as the prospect of a policy mistake that leads to inflation. 

Forget the question of how much stimulus the Fed should provide during a crisis. The greatest sin has been providing ever more stimulus during the good times. By all accounts, it’s a policy that the Fed has no intention of ever re-visiting as they pledge to keep rates low for years.

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