James Grant has been watching interest rates for his entire adult life. After serving in the Navy he earned a bachelor’s degree in Economics from Indiana University in 1970 and a master’s degree in International Affairs from Columbia in 1972, before launching a career in financial journalism at the Baltimore Sun.
In 1975 Grant moved to Barron’s and took over its coverage of bonds, the Federal Reserve and interest rates, just as the nation was experiencing its most dramatic upheaval in rates for a generation. Grant would write a column on interest rates for Barron’s until 1983 when he left to launch Grant’s Interest Rate Observer with a mission “to see the present more clearly and to squint into the future more imaginatively.”
Grant has written numerous books including three financial histories. His most recent book: The Forgotten Depression: 1921: The Crash That Cured Itself, offers a history of that event and, he argues, an alternative and better approach to dealing with financial crises like the one we experienced in 2008.
Modern Trader: After approximately eight years of a zero-interest-rate policy (ZIRP) the Fed has begun raising rates. Did they wait too long?
James Grant: Yes, I do think they missed their mark, as we say on Wall Street. You know the central bankers were quite confident that they could do what had never been done before and then, when the time was right, to undo it. But what they have discovered and certainly what many investors have observed is that getting out of these radical monetary gimmicks is not easy. It will be interesting to see them try.
MT: How close are we to returning to a normal Fed policy?
JG: I don’t think we are very close at all. The Fed has been talking about returning to something more or less normal since 2011. And it issued the outline of a plan to reduce the size of its balance sheet in 2014. The plan contained a simple escape clause that read: “The committee is prepared to adjust the details of its approach to policy normalization In light of economic and financial developments.” So fast forward three years to June 2014 when the Fed issues an addendum to the planned policy of normalization. But this time, there’s nothing simple about it. The essence is that if something is amiss, the committee would be prepared to revert to the full range of its tools; including balance sheet size and the like. So I say that QE4 is one perturbation away —whether it’s economic or financial. Until the country decides politically that it is time for a revamp of our monetary methods and thought processes, I think that we are coerced to become more and more abnormal at least in our monetary ways. Radical monetary policies beget more radical monetary policies.
MT: Obviously that tool shed is more crowded. Talk about the long-term impact of the extraordinary Fed policies following the 2008 credit crisis?
JG: The intentions were good; the consequences are likely to be adverse. Interest rates are prices, as prices they are better discovered than administered. We take that truth to be self-evident around here. We call it Grant’s Interest Rate Observer, so we are kind of sore that we have no interest rates to observe. The consequences of these policies are innumerable, and one of the more obvious is that when one part of the world sports sovereign yields of less than zero, including for the not so AAA credit of the nation of Cyprus, those rates will inform sovereign yields in other parts of the world through arbitrage. So American rates are very much tied to what’s going on in Europe and what’s going on in Japan. Every month, according to Deutsche Bank, the world’s central banks [account] for $175 billion in new credit and that credit ripples through asset markets and would not have been there except for these actions of central banks.