Submitted by Taps Coogan on the 29th of February 2020 to The Sounding Line.

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Grant’s Interest Rate Observer founder and editor, Jim Grant, recently spoke with CNBC about the prospect for central bank stimulus in response to the ongoing Coronavirus outbreak. Pointedly, he wonders: what exactly is a quarter point rate cut going to do?

 

Some excerpts from Jim Grant:

“We have the lowest rates, the longest business expansion, the most leverage, and the weakest corporate credit profile perhaps ever, and I am not certain what more leverage would do to improve things… The trouble with all of this is we go from cycle to cycle with more credit, more intervention, more infusion of credit, more fragility… The corporate immune system has been degraded through ten years of a fabulous bull market but increasingly weak balance-sheets. So, I am not sure what the cure for this is but I think a quarter point down on the Fed funds rate will not be material.”

“I think the solution is price discovery. One way to look at the price action today, and yesterday, and the day before, is that we are in the valuation restoration process. Not all bad. It’s a start.”

“How about this: The Fed offers to accommodate people who present collateral. It will lend at a market rate of interest. It will not force credit down the throat of the market. It will activate the discount window. That was the original plan for the Fed. The Fed was to provide seasonal accommodation for commerce, as the market requested that through the discount window. Now we have… an all-season infusion of credit, among other things, to sustain the market in financing the eternally growing federal budget deficit. This whole repo business… was about prepping the markets to absorb more and more of this debt. Where does this stop?”

“What’s wrong with keeping the credit pedal-to-the-metal is that it distorts judgement…”

“We are extended in valuation. We are extended in time. We are extended certainly in leverage and we are degraded in corporate credit quality. So we are going to have some difficulties. This is part of the life cycle of capitalism. Things go up. Things go down. They correct. What do they correct? Among other things, the mis-allocoation of resources that follows hard upon the suppression of interest rates…”

The Fed was not created to eliminate recessions. It was created to maintain the stability and supply of the nation’s currency and to be a lender of last resort during acute recessions. Only because markets have been distorted for years in an attempt to forestall reality have recessions become structurally dangerous. That danger should not serve as motivation for central banks to further distort markets, though it undoubtedly will.

There is more to the interview so enjoy it above.

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