Thursday, March 15, 2012

James Grant: The Alternative to what we have now is Capitalism

On what the Fed and other central banks are doing: We should call this what it is: Market manipulation.
The Fed is manhandling the structure of interest rates in order to achieve what it believes to be desirable macro outcomes. If the government, instead of manipulating the interest rate, would go down to the farmer's market at 14th Street and fiddle with the scales, there would be understandable outrage from customers. The Fed and other central banks are, in unprecedented ways, manipulating the value of their currencies; they are printing by the ton. Central banks are being recklessly procreative. The Fed in this latest gambit wants to manipulate long term interest rates lower. But in so doing, it is manipulating perceptions of risk and it is creating real inflation in the sense that people who want to retire on their savings, now need much more cash to do so. By repressing interest rates, the Fed is dulling the risk sensors of the entire marketplace.  It's all terribly dangerous.

On what history tells us: Ben Bernanke can't stop talking about the 30's but there is an instructive lesson from the early 20's. In 1920-21, the economy fell off a cliff. The treasury balanced the budget, the Fed raised interest rates, and the recession ended. That's a real living historical example of us doing the opposite of what is being done now - and it was successful.

On what the alternative is to what the Fed is doing: The alternative to what we have now is capitalism. We should be discussing a currency that is not created at the whim of a bunch of mandarins.

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