Economics, Videos

Jim Grant: ‘Fed Is Insolvent’ And ‘It Is Leveraged 100 To 1’

Jim Grant, the founder and editor of Grant’s Interest Rate Observer, and Judy Shelton, a former member of the Trump Economic Advisory Council, discuss the Fed rate hike decision with CNBC’s “Closing Bell” team.

Jim Grant leveraged 100 to 1

Jim Grant: ‘Fed Is Insolvent’ And ‘It Is Leveraged 100 To 1’

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Transcript

Does this take the heat off of Jay Powell from President Trump. Well it was a very nice press conference. And clearly had a calming effect. Markets found his words very reassuring. Chairman Powell comes across as a very earnest man. He wants to do the right thing for the economy. I think he put it in those words. He acknowledged that so many things are going well. Company earnings are coming in positively. We see wages going up. No worries about inflation. So I think that he he conveyed the idea that he doesn't want to mess things up by accidentally having a Fed policy that disrupts that hasn't ordinator effect on financial markets and in that sense. I think that everyone probably agrees that that was the right sentiment to put forward.

Jim do you agree.

I think that. The patience and common sense. [inaudible]. We ought to have. I think. Not so far underneath the surface of the big problems with the way we do business is central banking. For example. The fed on a mark to market basis is what it was. As of September 30th insolvent. It is leveraged 100 to 1. That was showing 66 billion in unrealized losses mostly mortgage portfolio. Now it is never going to be a mark to market and the Treasury has guaranteed its losses. But this is a sign of the disorder. In the structure. Of. Our finances. Other such signs would be a 1 trillion dollar budget deficit in a year of booming prosperity. The persistent doubters say international investment position. So. I am here with you to Susan. It was lovely. More money is more better. For markets right. But I think that this is really not. It's not reality.

It's not reality. I mean. What it's supposed to do about that.

Well I think I think the fed cow picture powers giving her a very difficult hand. I think he's playing it reasonable reasonably and playing it well. But you know he has to a great extent. I think that prisoner of the institutions and of the history that he has. Inherited. And among these inherited. Are a 4 trillion dollar balance sheet which the Fed under which the Fed has. Thirty nine billion dollars of capital. So it's as I say it's leveraged 100 to 1. And. That's a symptom a symptom of the overstretch of our debts and of the dollar as an institution.

Judy clearly the international picture has worsened and that's another factor that no doubt was considered. Do you think that suggests that the dollar's move today might be temporary and that despite a dovish tone today we might start to see a stronger dollar again as the year plays out.

Well it's hard to predict. There's always reasons when it goes up to explain afterwards why it did. But likewise when it goes down I was struck today by the humility. That Chairman Powell brought to his analysis who kept saying we don't we don't really know where it's all going to be data driven and we have to keep researching and to be able to clarify our thinking about all of this information that comes into into the decision process. I think. We've come around to believing somehow that the Fed chairman has to be on this. And I have great respect for people who are in the arena who really have these real time responsibilities and. Markets start to crash. I'm sure a certain amount of. Panic sets in. But I. Have the luxury of observing. From the from the point of view of someone who wonders about the role of central banks and whether they have become too dominant and too big a factor. In the.

Performance of financial markets. So Jim I mean what are the in the near term investment implications of all of this if the Fed. Really is taking a pause here along the long term implications for. More steeply.

Sloping yield curve more inflation protection along the shape of higher yields. I guess it's good for the stock market I guess it's good for the gold market. But you said something about about the presence of the Fed in our financial affairs we are reminded. Of the referees in the NFL who are mortified to find that they were the story after this game in New Orleans. Or at least it was with New Orleans. And so the referees would affect our cost of running. The story. And I think that. Perhaps. A. Better tempered financial world. The Fed would be rather more in the background. I couldn't get to a great. One. Sir. We get rid of it. Well I think there are alternatives. There are alternative monetary system that we ought to be ought to be thinking about. Currently.

Sir I do I see you shaking your head now requires a much longer recession about heart. Well Jim we've got.