From the United States to Europe and Asia: The world’s central banks are flooding markets with liquidity and pushing deeper into unknown monetary policy territory. Jim Grant tells Germany’s Finanz und Wirtschaft that he “fears that this journey will not end well.” The sharply thinking Wall Street veteran doesn’t trust the theoretical models of the central banks and warns of irrational exuberance in the financial markets adding that “the stock market is increasingly full of stocks that are borne aloft by hope rather than demonstrated performance.”
Germany’s Finanz und Wirtschaft
Mr. Grant, half a decade after the financial crisis, hope is rising that the United States finally is on a sustainable path to economic recovery. How are chances that the US economy gets back soon its status as the growth engine of the world?
In the past, the United States has been very resilient even in the face of very unfavorable and even punitive policy measures. The United States seem to want to be prosperous despite of what’s happening in Washington. Therefore, one can never rule out a great unscripted outburst of prosperity. I hope for that to happen, but I don’t predict it. Also, I’m coming increasingly to wonder about the concept of an economy as an integrated whole. People who talk that way don’t appreciate the incredible complexity of individual choices and decisions. Until fairly recently, no one thought about what we now call the economy as anything organic and macro in whole. This wasn’t a concept that entered our collective thinking until the nineteen forties. If you go back and read what economists wrote and what newspapers reported in the early portion of the twentieth century, you see that they would talk about prosperity or depression. But they wouldn’t talk about the economy. They just didn’t see it that way.
Signs of a brighter economic environment have encouraged the Federal Reserve to finally start the tapering of its massive bond purchase program, also known as QE3. What’s your take on this, for most market participants surprising move?
The «non-taper taper», Wednesday’s announcement, is yet another Federal Reserve innovation. To remove the sting from its decision to reduce the gait of its asset purchases, the central bank has vowed to hold its policy rate at zero even when the jobless rate falls below 6½%. «Inflation or bust – or both» would appear to be the Fed’s mantra.
Janet Yellen, who will be the next Fed chairman, has already made clear that she stands behind the recent monetary policy. What can Investors expect from her?
She is the key figure head of our monetary system which is what I call the PhD-standard. In the not so distant past, until a generation or so ago, central bankers were as likely to be ordinary bankers or ordinary business people as they were academics like the college professors who are mainly running the show now in this country. Apparently, in the Federal Open Market Committee, the interest rate setting regime here, nine out of the twelve members this year never had an experience in the private sector. Janet Yellen is the quintessential academic economist who is now in charge of what we ought to call – in the interest of plain speaking – price control. They certainly mean well but they have led us on a path of price administration rather than price discovery.
What do you mean by that?
If you ask economists they will tell you that price controls are a very bad idea. But that’s exactly what these mandarins at the Fed are doing. We are embarked on a unique experiment in monetary manipulation. That kind of central banking might be more accurately called central planning. One time, I therefore asked Fed-Governor Jeremy Stein in an open meeting if he could help us understand the substantial economic difference between central banks manipulating money market interest rates on one hand and traders at commercial banks manipulation Libor at the other. He just denied answering it. Also, since interest rates are artificially low the valuation of all earning assets must be called into question. This is the difficulty investors are facing the world over. We live in a hall of mirrors thanks to the zero interest rate regime and the chronic nonstop interventions by central banks
