James Grant: The Firemen Are Also the Arsonists

The comments below are an edited and abridged synopsis of an article by John Rubino

James Grant, the publisher of Grant’s Interest Rate Observer, just wrote an opinion piece for the Wall Street Journal that, had it appeared on a free site, would have been at the top of today’s ‘Best of the Web’ links list. But since it exists behind the WSJ’s paywall, here’s an excerpt from ‘The High Cost of Low Interest Rates’ to illustrate why Mr. Grant has so many fans:

James Grant: The Firemen Are Also the Arsonists | BullionBuzz
Three firefighters putting out an house fire. Horizontal shot.

“It took a viral invasion to unmask the weakness of American finance. Distortion in the cost of credit is the not-so-remote cause of the raging fires at which the Federal Reserve continues to train its gushing liquidity hoses.”

“But the firemen are also the arsonists. It was the Fed’s suppression of borrowing costs, and its predictable willingness to cut short Wall Street’s occasional selling squalls, that compromised the US economy’s financial integrity.”

“The coronavirus pandemic would have called forth a dramatic response from the central bank in any case. Not even the most conservatively financed economy could long endure an official order to cease and desist commercial activity. But frail corporate balance sheets and overextended markets go far to explain the immensity of the interventions.”

“Perhaps never before has corporate America carried more low-grade debt in relation to its earning power than it does today. And rarely have equity valuations topped the ones quoted only weeks ago.”

“Deceived by ultralow interest rates, Americans borrow and lend in the kind of false economy that candidate Donald Trump properly condemned in 2016. Covid-19 will sooner or later beat a retreat. For the sake of honest prices and true values, it would be well if the central bankers did the same.”

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