FISCAL/MONETARY UPDATE – SHORT BUT PROFOUND SUMMARY OF WHAT’S GOING ON!
Our discussions relative to fiscal/monetary developments are not pulled out of thin air. Putting it another way: we don’t make this _ _ _ _ (stuff) up! Also, it doesn’t take a PHD in economics to understand what’s going on. The basic laws of supply and demand are more a force of nature (like gravity), comprehensible to a kindergarten student, than the necessary subject of a graduate school thesis.
One of our most valued economic sources is the incomparable monetary historian, James (Jim) Grant and we have been a subscriber for decades to his “Grant’s Interest Rate Observer”. There’s nobody smarter, a better writer or, a nicer guy than Jim. He was kind enough to write the foreword for a book I republished in 2012, Harry Brown’s “How You Can Profit From the Coming Devaluation”. That book, by the way, was just as relevant in 2012 as when written in 1970, and even more so today (after exactly fifty years). A free copy is sent to every paid subscriber to this website.
Yesterday’s issue of “Grant’s Interest Rate Observer” talks again how suppressed interest rates causes “mis-allocation of capital’. As a result, investors increasingly reach for yield, in stocks, in bonds, in speculative stocks, in cryptocurrencies, in SPACs, etc. etc. The predictable result from the fiscal/monetary party is a serious hangover, as we reiterated here just a few days ago.
Just to put an even finer point on Jim’s (and my) conviction, Jim yesterday wrote:
“We have put in place strong incentives for risk taking,” said current Fed chair, Jerome Powell, in March 2013, when he was a governor of the Federal Reserve Board with less than a year on the job. We should expect that dealers and investors will take more and more risk as time passes. Dealers will assume balance sheet risk….or they will watch their competitors do the business. Investors will assume that the Fed has bounded (protected) the downside and take more risk through leveraged credit and duration.”
Jim, the monetary historian without peer, then goes a bit further:
“But it’s a still-earlier observer of financial cycles who deserves the last word. Standing before the Manchester Statistical Society on Dec.11, 1867, John Mills (not to be confused with John Stuart Mill, the philosopher and economist) read aloud his lengthy, undeservedly forgotten esssay, ‘On Credit Cycles and the Origin of Commercial Panics’.
“Here is the money quote::
‘After the violence of a crisis has subsided, it becomes clear that it is not upon Capital, nor even upon legitimate commerce that the blow has fallen heaviest. As a rule, Panics do not destroy Capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.’
No matter how things change, the more they stay the same.
Roger Lipton