Jim Grant Is Calling a Spade a Spade

Jim Grant has always been a vocal critic of the Fed, and several recent comments of his in an interview he gave to CNBC are worth highlighting:

“The Federal Reserve's stimulus policies should have gone by a different, more controversial name, the founder and editor of Grant's Interest Rate Observer told CNBC on Wednesday.

Quantitative easing seems more like price control, said Jim Grant, who writes a twice-monthly journal that covers U.S. financial markets. And past attempts at artificially keeping prices low have ended badly, Grant told CNBC.

"It strikes me that the Fed in substance, if not in name, is engaged in a massive experiment in price control," Grant said. "They don't call it that. They fix the funds rate. They manipulate the yield curve. … I said 'experiment in,' but there is no really suspense about how price control turns out. It turns out invariably badly."

[…]

Bernanke's attempts to salvage the country's financial system in 2008 during the worst economic crisis since the Great Depression have been cast in a more favorable light after the U.S stock market saw record gains in 2013.

Grant doesn't share that view. Investors, he said, cannot trust market valuations in light of Bernanke's three rounds of quantitative easing. Also, despite record gains in 2013, the recent bull market in stocks was fueled by "excess dollars" from Fed policies, he said.

"They have their fingers, their thumbs, on the scales of finance," Grant said. "To change the metaphor, we all live to a degree in a valuation hall of mirrors. Who knows what value is when the Fed fixes the determining interest rate to zero."

Grant did not limit his criticism of the Fed to its policies. He described the institution as out of touch with market and technological forces that could help drive down prices and costs without intervention from "monetary mandarins."

"It seems to me that anyone who believes themselves or herself to be a capitalist ought to be in favor of the verdict of the marketplace," Grant said. The Fed is "a command and control regime that by the way is holy and anachronistic. The whole idea of social media, the great rush of technology in the 21st century, is collaboration.”

(emphasis added)

Indeed, what they are doing amounts to price control, or rather control of a price ratio, namely the valuation of present vs. future goods. The problem is not only that investors cannot trust asset prices and that they are in a 'valuation hall of mirrors' as Grant so trenchantly puts it. Stocks are titles to capital, and as such are so to speak a signal for the price revolution that has taken place in the entire economy. Since interest rates are the factor by which the present value of future goods is discounted, prices all along the capital structure are falsified, and the further from the consumer stage capital is situated, the greater the effect will be. This is why when the manipulation of interest rates inevitably ends in a bust, the capital goods industries are as a rule hit the worst. 

Tireless Fed critic Jim Grant – Youtube screenshot

Money in the Thrall of Quacks

Grant is quite correct in calling such a central planning organization anachronistic.  No-one would ever think of complaining about the fact that innovations in production methods and technological progress are driving down the prices of certain goods in spite of the inflationary policies of central banks.

Neither consumers nor producers of e.g. smart phones, tablets, PCs, and so forth, would ever consider the fact that the prices for these products are declining to be somehow bad. On the contrary, precisely because these prices have declined massively was it possible for all these items to become products for the masses, which more people than ever before can afford today.

However, central banks insist that overall 'inflation' – i.e., the speed at which the (anyway unmeasurable) general purchasing power of money is supposed to decline – has to amount an arbitrary percentage (2% in the case of the Fed) per year. Given that the productivity growth of the industries producing the aforementioned products (we picked out only three products that are good examples illustrating the principle, there are many more products that could be added to this list) is so great that it outpaces the effects of the inflationary policy, it follows that the prices of certain other items must rise disproportionately in order for the arbitrary chosen rate at which money is supposed to be debased to be achieved. That is why we see the prices of certain goods and services, such as houses, education or healthcare soaring at such breath-taking rates. Think about this for a moment – it is actually scandalous that these price increases are imposed on us by a bunch of unelected bureaucrats. The quacks running central banks like the Fed deliberately dilute the money they issue year-in-year-out based on theories that should have been thrown into the dustbin of history long ago.

Why should consumers and producers be at the mercy of such witch doctors? Why should the economy be forced to put up with central planning agencies that have been founded in the distant past under transparent pretexts in order to enrich an elite and to serve as handmaidens for the surreptitious funding of the State (with the funding of war incidentally a top priority)? 

'Stable money' Fed-style – chart from D. Short's inflation data page – click to enlarge.

Mediocre, Statist Intellectuals

Economists of various schools of thought have many disagreements, but there are also a number of basics on which they all tend to agree. No serious economist would argue that price controls are a good thing. And yet, when it comes to a central planning agency manipulating interest rates and the money supply, most of them seem to make an exception. There are several reasons for this. One is that most of today's professional intellectuals are beholden to statism. Among economists, many have never been able to fully shake off the ideas of Marxism and the later ideas of all sorts of monetary cranks ranging from Silvio Gesell to JM Keynes (who it should be pointed out merely warmed up what even earlier cranks like John Law had cooked up). They cannot bring themselves to accept that the economy cannot be successfully centrally planned.

While most will today admit that the collapse of the command economies of the former Eastern Bloc has delivered a devastating and final verdict on full-scale socialism, they are still not prepared to fully wean themselves from the idea of the planned economy. They think there should at least be a certain degree of planning. Of course this has also to do with the fact that a true free market economy would have very little use for 'macro-economists', least of all mediocre ones. Only those actually capable of advancing the science could hope for funding, and there would be no guarantee that they could earn a living from macro-economic theorizing; great commitment would be required. They would depend on private donors, so the quality of their work would have to be quite convincing.

Compare that to the situation in which they find themselves today. Central banks have simply bought the profession off – literally. Naturally they are not going to bite the hand that feeds them, especially not when their masters are certain to never have a problem to pay!

As Hans-Hermann Hoppe points out:

“[...] intellectuals are now typically public employees, even if they work for nominally private institutions or foundations. Almost completely protected from the vagaries of consumer demand ("tenured"), their number has dramatically increased and their compensation is on average far above their genuine market value. At the same time the quality of their intellectual output has constantly fallen.

What you will discover is mostly irrelevance and incomprehensibility. Worse, insofar as today's intellectual output is at all relevant and comprehensible, it is viciously statist. There are exceptions, but if practically all intellectuals are employed in the multiple branches of the state, then it should hardly come as a surprise that most of their ever-more voluminous output will, either by commission or omission, be statist propaganda.”

(emphasis added)

It should be added to this that today, we are all at least initially a product of public education and an intellectual leap is required to shake off the years of propaganda one has been subjected to throughout school and university. For many the choice is later between a fairly comfortable and well-remunerated life in which they must be careful not to stray from the establishment-delineated boundaries of discourse, or the much more difficult life of someone who is searching for and disseminating the truth.

A Pernicious Fraud

As far as the despicable economic quackery of the central planning agencies at the heart of so-called 'free market economies' goes, the above-mentioned boundaries of discourse decree that criticism of these institutions qua institutions is verboten. One is allowed to discuss their specific policies and voice an opinion on them or offer ideas (as long as the assessments are not too harsh), but if one calls a spade a spade and points out that the entire arrangement is nothing but an elaborate and pernicious fraud, there will no longer be any offers from reputable schools or payment for writing papers full of incomprehensible  gobble-de-gook which nobody reads anyway (as an economist one must never forget to garnish same with plenty of important looking mathematical formulas, otherwise it cannot be 'science'). Countless members of the largely bought off profession of economists list some form of statism-oriented research as their specialty (Robert Auerbach estimated in 2009 that some 1,500 economists in the US list 'monetary policy' as one of their specialties and that the Fed at any given time employs or contracts with at least 500 of them – all numbers that have undoubtedly increased further).

This is why one comes today across articles in the press such as this one, where one is informed that Michael Woodford “is widely regarded as the greatest monetary economist of his generation”. His specialty? Monetary policy – in other words, advice to central planners. His most famous recent paper can be seen here: “Methods of Policy Accommodation at the Interest-Rate Lower Bound”. Now, Woodford is without a doubt a well-educated, intelligent man quite knowledgeable about the ins and outs of modern-day monetary planning. But this is not science, it is scientism. The central planning pursued by central bank bureaucrats must be based on the assumption that the economy is akin to a machine that is amenable to steering by means of a mechanistic approach borrowed from physics or other natural sciences. However, if that were true, then socialism would not have collapsed – it would have worked.

Conclusion:

It is erroneous to believe that the market economy can be improved by having money and interest rates under bureaucratic control. Historically, the idea that this is actually possible has actually only slowly gained ground as the intellectual fig leafs justifying central banking have been put in place bit by bit over time. The founders of central banks at best presented such ideas as a pretext and their true motives were far less pure. Even if we grant that most of the people serving at central banks today are largely well-meaning and probably believe in their mission and methods, the fact remains that what they are officially tasked with accomplishing cannot possibly be an improvement relative to a market-based system. In fact, all the evidence points to their activities being extremely harmful, as they clearly are at the root of the boom-bust cycle. As Jim Grant points out, economic activity is all about voluntary cooperation and collaboration, something that is especially obvious in the fields of cutting edge modern technology. Central banks are nothing but an anachronistic remnant of a time when people had not yet fully recognized the supremacy of the market in economic affairs. They need to be abolished.

Chart by: D. Short / Advisorperspectives