Risk Sensors Switched Off

"I've been having this nightmare. A real swinger of a nightmare, too."
--Bennett Marco (The Manchurian Candidate)

As usual, Jim Grant makes a number of salient points. Perhaps the most important one is at about 2:20 when he notes, "by repressing interest rates, the Fed is in effect dulling the risk sensors of the entire market place. Is this good?"

Of course not. The Fed is prodding people to take excessive risk. Excessive in that it is more than free markets would encourage at this juncture. The number and implications of the distortions that flow from this interventionary are impossible to determine with certainty. But we can be confident that they amplify the myriad distortions of past policy interventions seeking to do the same thing.

Grant also observes that the impact of central bank inflationary policies should not necessarily be immediately evident in consumer prices. We have been noting such in these pages for years. It is impossible to predict precisely where fiat money will go when it is printed. We don't even know if it will be spent. Indeed, freshly printed money may stay in people's pockets or on bank balance sheets while people assess the environment.

If it is spent, that spending may go to pay down debt. If spent in this manner, cash actually can have a deflationary effect (cash retires debt; less debt is deflationary).

Newly printed money might also be spent to buy stocks, bonds, real estate. Indeed, financial institutions who typically get newly created credit money first from the Fed are often highly motivated to spend it on securities--particularly in environments where they know the Fed will come to their rescue should their investments go bad.

Yet, we have been induced into thinking that it is consumer prices (e.g., 'core CPI') that we should be watching for signs of inflation.

Mr Grant is almost too kind in his assessment that we may be watching the wrong indicators. It seems that we're behaving like brainwashed pawns, incapable of seeing evidence that sits plainly in front of us.

Our risk sensors have been switched to the off position.