James Grant: Keep hold of your gold

James Grant’s newsletter, Grant’s Interest Rate Observer, is required reading in the financial world, says Switzerland’s Finanz und Wirtschaft (F&W). Grant was among the very first to warn of a dangerous credit and housing bubble. The FT’s John Authers called his prescience “uncanny”.

Grant has never been a fan of central banks. Their easy-money policies helped fuel the crisis, and they are still causing trouble by blowing up bubbles in various markets.

All economists know that price controls are not a good idea, he tells F&W. Yet that’s exactly what the Fed and other central banks do – they set the price of money. It’s basically central planning.

In the run-up to the crisis they set it too low; now frenzied money-printing is creating further market distortions. We live in a “central banks’ hall of mirrors”. With interest rates nailed to the floor and all this liquidity flooding into markets, how are investors supposed to gauge the fair value of assets?

Central-bank activism is justified as a means of warding off deflation (falling prices). But Grant says the “hysteria” over deflation is overblown. In the late 19th century, innovations such as the telephone and electricity slashed costs and hence prices, he notes. With real (after inflation) wages rising, most people flourished.

Today, digital technology and cheap emerging-market labour are putting similar pressure on prices. Inflation, however, is a danger due to central-bank activism, and if it emerges, bond yields – long-term interest rates – could well rise rapidly, causing a slump in bonds and choking off growth.

Central banks say they’re in control, but it’s hard to see how they can lead us out of the mess they created without turbulence. So own some gold as portfolio insurance: it’s an investment in the all-too-likely failure of central banking and fiat money.

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