Era of No Monetary Precedent

"Mr Dale, I'm obviously sorry that we are here today but these are extraordinary times as you very well must know."
--Lauren Bratberg (Margin Call)

James Grant suggests that people forecasting economic futures given our current state are kidding themselves. Worldwide, over $8 trillion in securities are priced to yield less than zero. Nowhere on the Treasury yield curve are investors earning above zero returns after inflation and taxes. By one measure, interest rates are at 500 year lows.

These extraordinary circumstances are the consequence of force--force exerted by central bank monetary policies to suppress interest rates around the globe. Grant argues that, because of these unparalleled conditions, the future is extremely difficult to script, and that investors should be prepared for a outcomes difficult to fathom in our present state.

A scenario that Grant has been considering is one where inflation increases more than expected in a world that has grown extremely comfortable to ultra-low rates. He notes that in the 1960s, inflation rates were low and seemingly under control--"and then suddenly the world changed" leading to the stagflationary 1970s.

The problem with higher inflation in today's world is that, because we've been living in a world of essentially free money for many years, the "economy is capitalized for ultra-low interest rates." Small upticks in rates to, say, four percent, which is a very common level over the past 30 years, would be "a very disturbing thing" in this environment.

I think he's right. We indeed live in a era of no monetary precedent. People have come to believe that low interest rates will last forever courtesy of central banks. If the CBs lose control of their low interest rate regime, then the associated reactions by surprised economic actors worldwide would likely not be pleasant.

Perhaps we're getting a preview of that disturbance complements of increased market volatility worldwide.