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Jim Grant: Fed Has Erected a Distorted Economy and 'Hall of Mirrors'

By John Morgan   |   Monday, 24 Feb 2014 01:47 PM

Jim Grant, founder and editor of Grant's Interest Rate Observer, says the Federal Reserve has set up a giant "hall of mirrors" that is distorting the stock market and the broader economy, and the entire edifice is bound to be shattered.

In this "Alice Through the Looking Glass" world, things are definitely not what they seem, Grant told CNBC.

In particular, the Fed's massive asset purchases and near-zero interest rate policy have driven up risk, in his view.

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"My fear is that because interest rates are suppressed, therefore earnings are inflated. So when rates go up… the hall of mirrors is shattered and we look at each other and see what actually is real rather than what the Fed wants us to believe."

Grant said he believes an activist Fed driving policy on its own is not in the best interest of the economy in any event.

"The trouble is that the central bankers ought to be the referees, they ought to be the umpires. Instead, they are down there on the field, they are running the bases. . . . Time was when central bankers were, quite suitably, anonymous people, they were in the background.

"When they become masters of monetary improv, . . . we know that something is wrong."

Grant said it was a mistake for the Fed to have intervened during the 2008 financial meltdown because it prevented markets and wages from hitting an appropriate bottom.

"What happens in a capitalist economy when there is not intervention? Prices get low enough to invite buyers to come in and seize that value."

The nation's experience since the Fed's massive stimulus efforts, with artificial stock prices and stagnant growth, is a "very persuasive demonstration of the futility of intervention to solve a recession," he told CNBC.

The release last week of minutes from the 2008 meetings of the Fed's Open Market Committee (FOMC) was revealing, according to The Economist.

"As it turns out, the FOMC was late to recognize the severity of the financial crisis and slow to head off the economic damage. But that's no surprise; it is, after all, why we had a severe financial crisis and recession.

"Somewhat more interestingly, we learn how they got it wrong: in general by being too conservative and specifically by worrying too much about inflation," the Economist remarked.

The New York Times echoed that assessment.

"The hundreds of pages of transcripts, based on recordings made at the time, reveal the ignorance of Fed officials about economic conditions during the climactic months of the financial crisis. Officials repeatedly fretted about overstimulating the economy, only to realize time and again that they needed to redouble efforts to contain the crisis," the Times reported.

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