2 Jun 2011

James Grant and James Turk discuss gold, the Fed and the US economy

James Grant, founder and editor of Grant’s Interest Rate Observer and James Turk of the GoldMoney Foundation discuss the Fed's history and how "mission creep" has taken it wildly beyond its initial remit, to the point where it is now conducting such experiements as quantitative easing (QE) and a zero interest rate policy (ZIRP).
They talk about who benefits from zero interest rates and how savers are penalised by this easy money policy. They explain how the US has effectively been off the gold standard since 1913, Bretton Woods being only a shadow of the classical gold standard. In the last 40 years low interest rates have encouraged leverage and speculation, which have reached incredible levels.
They discuss the fiscal profligacy of the US government, but note that a solution to America's debt problem could still be found if the political will existed. US strengths and positive momentum could still be harnessed to save the dollar if people’s eyes could be opened. However, they conclude that every paper currency in history has eventually gone to zero.
James and Jim Grant also talk about ZIRP and the absence of the bond vigilantes after a 30 year bond bull market, and how traders no longer care about fundamentals – like balance sheets – but instead focus on very short-time horizons and the spreads between funding costs and yields. In their view, this situation as unsustainable.
Jim still see gold as a very under-owned, misunderstood and marginal asset that is still shunned by institutional investors, with a few notable exceptions which indicate that the tide could be turning. He see's the US returning to the gold standard in the future, although timing is always uncertain.
At the end they talk about the history of specie payment resumption in the post-Civil War US, and how there could be parallels between this historical episode and a future return to the gold standard in our day and age. Private alternatives and competing currencies are a possibility; if politicians are too slow to provide solutions the market could do it for them.

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