James Grant On The Fed's Im-Balance Sheet: Insolvency Rules
Bernanke's Fed Quantitative Easing FAIL
Hall of Fame truth teller, James Grant, publisher of Grant's Interest Rate Observor, made an all-too-rare appearance on CNBC's Squawk Box this morning. Below are some of the more interesting comments from Grant.
"If the Fed examiners were set upon the Fed's own documents—unlabeled documents—to pass judgment on the Fed's capacity to survive the difficulties it faces in credit, it would shut this institution down."
"The Fed is undercapitalized in the same way that Citicorp is undercapitalized."
"15 out of 16 primary government bond dealers are in agreement that the Fed will not move before the year end."
"There is no such thing as bad bonds, just bad bond prices."
Steve here. Grant believes that inflation could become a problem sooner than some expect, even without any upward pressure on wages. His belief is premised on the continuing collapse of the U.S. Dollar. I wrote last night that 2012 might be about the time we start to see Jimmy Carter-style price hikes begin. The deflation trade is not very popular. It's been a slow succumbing to conventional wisdom. It's an easy shout to say we are Zimbabwe, or Weimar, Germany with the truly unprecedented and masssive liquidy now greasing the skids. Not so easy to deflect, either. Still, I believe it will be strictly commodity related hikes. Still way too many assets on the im-balance sheets of the infirm.
It's been a legendary debate: the truncated battle of inflation vs. deflation, and so far the deflationists have been winning rather easily. There has been talk of hyper-inflation for more than 18 months as the Fed's balance sheet has expanded dramatically with the crisis, yet no sight of it anywhere outside of natural resource hedges.
While the U.S. dollar has been falling in value recently vs. other foreign currencies, we have definitely seen a spike in resource prices as a hedge against dollar assets and potential U. S. inflation, but deflation of real and financial assets continues. Take a look at commodities priced in Yen or Euros, and you will see a different picture.
For those quick to dismiss the deflationist argument, asset deleveraging is a formidable opponent. And we have barely confronted the leverage conundrum even this late into the crisis. Who's the natural buyer when all the players need to sell? Japan has been printing for 19 years and the boogeyman has never appeared.
The excellent CNBC clip from this morning is after the jump.
Jun 10, 2009 at 4:03 PM
Reader Comments (9)
It's the eternal question, undoubtedly. And I do not profess to be an expert on that subject. I simply read everything I possibly can on both sides of the debate and form my opinions accordingly.
I will say however, that James Grant is one of the top 5 most reputable authorities in THE WORLD on interest rates and inflation. When he says deflation is still winning the battle, I tend to believe him.
As for commodites spiking recently, that has coincided uniformly with the fall in teh dollar. If you looked at commodity prices as measured in other currencies you would see a much different picture.
Thanks for reading and sharing you thoughts.
http://dealbook.blogs.nytimes.com/2009/06/10/citi-sets-plan-to-convert-58-billion-in-stock/?ref=business