As we enter another financial year of the ‘new normal’, where we see zero per cent rates, apparent stagflation and high unemployment, we sit here with continued doubts and concerns. We’re worried. Who isn’t? Electorates all over the world can feel that something isn’t quite right.
Do our political and economic captains have it as sussed as they think? Or even partly sussed? We suspect not.
Reading James Rickards’ recent book, Currency Wars, over the holidays reminded us of a thought provoking interview we listened to last year when Jim Grant appeared on King World News. Mr Grant is another of our favourite commentators, and publishes Grant’s Interest Rate Observer.
Mr Rickards and Mr Grant were sounding some similar tunes when it came to concerns about the actions of central banks today. Especially criticised is the Federal Reserve. Central banking has extended its remit in what is a mammoth example of ‘mission creep’.
Tumorous growth of central banking
Mr Grant’s observes how the Fed is involved in the stock market like never before because Governor Ben Bernanke has taken credit for rises in equity indices. Mr Grant feels this has backed the Fed up an apparent policy alley.
But I wonder what does it do? What can it do? What is it morally bound to do? If the savers who have been driven out of non-yielding deposit accounts. What happens to those savers if their equity investments suddenly are shredded? Does the Fed stand idly by? I don’t think it can. So I don’t think one can absolutely predict QE III, but I think the Fed will think long and hard before standing aside and letting the chips fall, when, not if the market suffers the next down draft.
Today’s world of negative real rates is ironic when you compare the conduct of the Fed today with the expressed intentions of the founders almost 100 years ago, and Mr Grant reckons that “it is as if the Fed were managed with the very purpose of negating every founding principle”.
The role of central banking
So what are the intellectual foundations of central banking?
Mr Grant suggests that the great British financial and political writer, Walter Bagehot, may be a good place to start. His book, Lombard Street, published in…
