Jim Grant, author of Grant’s Interest Rate Observer, is one of the world’s best economic forecasters. Widely respected, Grant successfully forecast the junk bond collapse of the 1980s, the dotcom crash and the mortgage bust that led to the global financial crisis. When Grant speaks, it’s wise to listen. And last week, he provided a range of fascinating insights to AP, which should leave readers in little doubt as to what Grant feels will happen to markets in the coming years.
Like many other commentators, Grant appeared critical of the ultra-loose monetary stance of the Federal Reserve, noting that:
“The US is uniquely privileged in that we alone may pay our bills in the currency that only we may lawfully print. That’s our prerogative as the reserve-currency country. But it has seduced us into a state of complacency. We never actually pay the rate of interest that we might be expected to pay — the real rate of interest — on Treasury debts.
“It’s great for now that we’re paying 2.5% or whatever on our public debt. But wouldn’t it be better if there were an accurate price signal that was telling us that we’re borrowing too much?”
One accurate signal of the US’ profligacy has been the rapidly appreciating gold price. When super investors such as John Paulson and George Soros acquire billion-dollar positions in the yellow metal, it is a powerful signal that investors have little faith in Ben Bernanke and Congress to control inflation.
As Grant noted, gold “is the reciprocal of the world’s confidence in the likes of Ben Bernanke. I think the price will go higher”.
When questioned on what Bernanke should do, Grant’s response was simple, “resign”.
The irony of the likes of Bernanke and Tim Geithner being given responsibility to steer the US out of recession is especially deep given they failed to foresee the US mortgage crisis in the first place. Unlike the likes of Jim Grant.
Just how utterly wrong Bernanke has been was perfectly shown in a 2005 interview with CNBC, shortly before a collapsing US property market dragged the nation into an economic crisis. Bernanke stated that:
“While housing prices are up quite a bit … it’s important to note that the fundamentals are also very strong. We’ve got a growing economy, jobs, incomes. We’ve got a very low mortgage rates. We’ve got demographics supporting housing growth. We’ve got restricted supply in some places. So it’s certainly understandable that some prices would go up. I don’t know whether prices are exactly where they should be. But it’s fair to say much of what’s happened it supported by the economy.”
The man in charge of the world’s “reserve” currency then noted that:
“[House prices falling] is a pretty unlikely possibility. [Because] we’ve never had a decline in house prices on a nation-wide basis. What … is more likely is that house prices will slow, maybe stabilise [and it won’t] drive the economy too far from its full employment path.”
The US unemployment rate is officially 9%, but many believe that actual unemployment is closer to 23%. Of course, Bernanke got is slightly wrong about house prices as well, which fell by 30%, and far more in certain regions.
So who to listen to? The likes of Jim Grant, or the banker’s banker, Ben Bernanke?