Jim Grant “Federal Reserve and World CBs Manipulating Currency”

the federal reserve reportedly considering a new bond buyingprogram to bolster the economy. the wall street journal said the plan would buy more mortgage or treasury bonds but borrow itback for short periods at lower rates. my next guest says such a plan would do more harm than good. james grant from grant’sinterest rate observer. and kelly evans from headquarters. good to see you, jim. thank you so much for joining us. good to see you. you say such a plan by the feds would be a wrong approach. we’ve had the easy money now for several years.what do you think the implications of it is? we should call this what it is, it is market manipulation, that’s what we call it in theprivate sector. what the fed is doing is manhandling the structure of interest rates to the end of achieving of what it takes to be desirable macro outcomes. if the government would go down to the farmer’s market at 14th street and fiddle with thescales, there would be an understandable outcry from thecustomers. but the fed and central banks the world over are inunprecedented ways of manipulating the value of what they’re printing, by a ton. in the latest gambit, the fed wants to manipulate long-term interest rates lower. but in so doing, it ismanipulating perceptions of risk, and it is creating a realinflation in the sense that people who want to retire in their savings, need much more cash to do it. and i like your latestcartoon, stick ’em up, this is a debt swap. yeah. in the latest grant interest rate observer, in terms of the inflationary story, we’ve been talking about the threat of inflation after a long time with this easy money. i want to get into the ecb as well, because it’s not just the fed. have we seen inflation yet? there’s inflation certainly in spots. obviously commodity inflation. but there’s also inflation, i think, in market assets that arestimulated, to use that favorite word of the authorities,stimulated by ultra-low interest rates. for example, in the distressed debt markets, you’ll find companies that have not made a profit in five years, issuing debt, as if this company were somehow soundly and demonstrably solvent. by pressing down interest rates, by repressing interest rates, the fed is in effect dulling the risk sensors of the entire marketplace. is this good? it’s the question to ask, kelly. and the reason so many people are focused on the drawback of these record low interest rates and the fact that it’s also punishing savers. i’m curious, it may not amount to anything, but jim, if the fed goes this route of sterilizing its quantitative easing, and if they do another round, what does that mean to you? why would they pursue that kind of act lend long, in other words. which is in the private sector, a great way to go broke, as a bank. the fed is going to do this. it thinks — the wall street journal is floating thisballoon. the fed doesn’t want to have us believe that it is recklessly printing money to do that, ergo the gambit of locking up the funds with which this buys the bonds. kelly, it looks like nothing more than what we’ve seen. it’s the fed interposing itself between the marketplace and — jim, it’s an overture to pem people like you who think the feds are creating inflation.do you read a message like that and feel comforted somehowthat — no, i am distinctly uncomforted, kelly. the fed is creating, if not inflation, it is creating disportions. what has the fed got against the price mechanism? it’s got in this country a long way over 200 years, suddenly, wherever the market sells off, we somehow have to have a fed interjection of money. what about the ecb? we’ve got the ecb allowing a three-year period where the banks can pay back the lending. what are they doing with that money? they’re actually buying sovereign debt. longer term, what about the ecb action? the ecb is going through akind of adolescent growth spurt. its balance sheet is positivelyexploding. its balance sheet is the equivalent of $4 trillion. it’s one-third larger than the fed’s. although the eurozone has aneconomy about 13% or 15% smaller than ours. the fed is a piker compared to what the ecb has recently been doing. i think the point is, the world over we’re seeing unprecedented things.we’re seeing interest rates that are lower than ever, and centralbanks that have never been more recklessly pro creative, to usewarren buffett’s words, about assets. they’re printing money likematted. and people can’t seem to get enough long-term bonds, because the central banks are manipulating expectations about the future of interest rates. i think it’s all very dangerous.we can draw lessons from the depression of the 1920s, butwhat are the actual consequences of this continued government intervention? can we talk about what happened in early 1920s? ben bernanke can’t stop talking about the ’30s.but in 1920, ’21, the economy fell off the cliff. nominal gdp was down 29%, wholesale prices collapsed by 40%. you know how the fed and the treasury re acted to this, the treasury balanced the budget and the fed actually raised interest rates. guess what, the depression ended. we keep on hearing thispropaganda stick drum beat assertion that in order to get us out of our sorrows, the authorities, the high and mighty ones, must run immense deficits,