By: Dan Weil
January 6, 2015
The huge stimulus programs engineered by central banks have done little to boost the global economy and will continue to do harm, says James Grant, editor of Grant’s Interest Rate Observer.
“In the past seven years central banks have conjured more than $10 trillion of digital wampum. Still, prosperity eludes them,” he writes in the Financial Times. The Federal Reserve’s balance sheet has ballooned to $4.5 trillion.
“The juxtaposition between clouds of electronic scrip on the one hand, and ultra-low bond yields on the other, is the financial non sequitur of 2015,” Grant says. “If it does not concern the stewards of capital today, it may torment them tomorrow.”
History will not treat central banks kindly, Grant says. “The heirs of today’s bondholders will read with amazement the history of post-2008 monetary policy,” he predicts.
“They will marvel at the faith of a non-church-going people in the mystical powers of central bankers. They will mourn the destruction of the wealth their forebears entrusted to feckless governments at barely positive rates of interest — or, in the cases of Switzerland, Germany and Japan, literally negative.
“Sooner or later, there will be a recession and a wicked bear market in stocks — there always are. How will the central bankers then respond? In outdoing even what they did before, what will they do to your money?”
Peter Schiff, CEO of Euro Pacific Capital, apparently agrees. Schiff predicts the U.S. economy and financial system will soon face a crisis, thanks to excessive easing by the Federal Reserve.
“We’re going to have to have a crisis on a much bigger scale than the one that’s going on in Russia right now,” he tells Newsmax TV‘s “America’s Forum” show.
“We’re not going to get a repeat of 2008, because the Fed is not going to allow that kind of crisis. If they raised interest rates, that’s exactly what would happen. We’d have a worse financial crisis than 2008.”
To prevent that, the Fed will refrain from raising interest rates and will instead launch another round of quantitative easing, Schiff says.
“But the consequence of that is going to be a currency crisis, a run on the dollar, a run on the U.S. bond market, which is going to be substantially worse, a much bigger disaster, far more painful to endure than any type of financial crisis that would have resulted from an increase in interest rates,” he explains.