Has the world seen the high water mark for inflation in this decade? In this century?
From Neue Zürcher Zeitung's TheMarket.ch, January 17:
Speculation is mounting that the Bank of Japan is losing control of the bond market. Jim Grant, editor of «Grant’s Interest Rate Observer», believes this could trigger a shock to the global financial system. He also explains why he expects further surges in inflation and why gold should be part of your portfolio.
The news caught markets off guard: On December 20th, the Bank of Japan surprisingly extended the target range for the yield on ten-year government bonds to plus/minus 0.5%. A move that not a single economist had expected.
This week, the Bank of Japan could announce a major policy shift amid rising government bond yields and a strengthening yen. Although barely a month has passed since the BoJ’s last meeting, the bond market is already testing the new upper limit of the yield curve control regime.
«To us, Japanese interest rate policy resembles the Berlin Wall of the late Cold War era, a stale anachronism that must sooner or later fall,» says Jim Grant. For the editor of the iconic investment bulletin «Grants’ Interest Rate Observer,» recent developments in Japan pose an underestimated risk to global financial markets. Not least because virtually no one is talking about it.
In an in-depth interview with The Market NZZ, which has been slightly edited for clarity, Mr. Grant explains what it means for financial markets if the Bank of Japan is forced to scrap its yield curve control policy. But first, he says why he doesn’t believe inflation will end soon, why bonds may be at the start of a long bear market, and why he believes gold is the best choice as a store of value.
What do you observe when you look at the financial world today?
Well, it’s always the same, and - here’s the catch - it’s always a little different. The trick is to identify the unique or unusual feature of a familiar cycle. In this regard, it helps to know a little bit of financial history, and to just that extent it helps to be a little old. But what is not helpful is to mistake the past for a certain roadmap to the future.
What are currently the most important developments from a historical perspective?
The essential driver of so much of today’s news are the consequences of the monetary regime in place worldwide. That regime has given us artificially low, indeed suppressed rates of interest, and it has given us the consequences of those false rates which include rampant misallocation of capital and great gusts of speculation; some of which are a lot of fun, and some of which are quite lucrative to the clever people who can get in on them.
However, in the wake of the surge in inflation last year, interest rates have risen rapidly. Now inflation seems to be subsiding. Was the rise in prices only temporary after all?
Plainly, the rate of change has subsided, but what is often ignored is the level of inflation. The rate of change is everyone’s preoccupation, but the loss in purchasing power is never recovered. This is the nature of a fiat currency regime. Way back under the gold standard, prices would rise on average and they would fall on average, but at the end of very long cycles, they would be unchanged. In contrast, a fiat currency regime is characterized by the fact that prices ratchet ever higher and never are allowed to correct to the downside. So what we have is a very elevated level of average prices and a somewhat lower rate of rise in these prices....
....MUCH MORE
Zo, James Grant joins ZeroHedge and Izabella Kaminska in the Gnomes of Zürich cabal.
It wasn't always thus: "Interest Rate Observer's James Grant Picks a Fight With the Financial Times' Izabella Kaminska"
For more on Izzy and gold see:Gold: I Fear Izabella Kaminska Has Gone Over To The Dark Side
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