Central Banks Are Trapped in a Loop of Radical Intervention (Video)

When asked by Bloomberg why he buys gold, Jim Grant explained that he is investing in monetary disorder. This disorder is already in motion, caused by central bankers who don’t understand that interest rates are actually a price. Manipulating interest rates is a type of artificial price control, which Grant warns always ends in disaster.

Gold is something to hold as an investment in the disorder of money as manipulated and managed by central bankers… One can observe that nominal interest rates without adjusting for anything were far higher during the Depression than they are now. These are the lowest nominal interest rates… in the history of the world. “

Highlights from the interview:

“If the market is missing anything, in my opinion – and one yields always to the market’s final judgment; that’s where the P&L is – it seem that error is classifying gold as a commodity, rather than a monetary asset. It’s a currency. It competes with the issuance of the world’s central banks. The world’s central banks are – again, in my opinion – in thrall to doctrines that are ultimately destructive to the currencies they emit. So it seems to me that gold is a great long-term – not a hedge against monetary disorder, because I think we have that – I think it is an investment in monetary disorder…

“Gold is something to hold as an investment in the disorder of money as manipulated and managed by central bankers, who have the following thought. Central bankers believe they can impose stability from on high while manipulating interest rates. That, to me, is a doctrine for instituting instability. Central bankers seem not to believe that interest rates are prices. Interest rates are, indeed, the most critical prices in capitalism. They define hurdle rates, they discount future cash flows. They define, or at least measure, risk. They have been manipulated by central bankers, and because of that we are looking at a regime of price control, which almost invariably has a bad ending…

“To me, the natural rate of interest would be the intersection of the supply of savings with the demand for savings, absent the materialization of central bank credit. Without attempting to penetrate the scholarship of the Federal Reserve Bank of San Francisco, one can observe that nominal interest rates without adjusting for anything were far higher during the Depression than they are now. These are the lowest nominal interest rates, basically as someone at the Bank of England said, in the history of the world. The Fed can’t really explain them away as a force of nature. These are, to a great degree, rates administered from on high. I want prices that are discovered in markets, not administered. But these are administered prices…

“[Ben Bernanke] calls this a savings glut. I would make a distinction that it is not so much a glut of savings as a glut of central bank created credit. This isn’t consumption deferred. It is currency materialized…

“It ends this way. The more assets grow, the lower the final returns to shareholders. Too many assets, too much competition, too low prices – lower returns. So what do central bankers hate? They hate deflation. So the more credit they create, the more investment there is, the lower the returns. And the more pressure on prices. What this ends in is a closed loop of intervention ever more radical…”

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