This is an interview of Jim Grant by Henry Bonner. If you're interested in the prospects for the US economy and major asset classes, particularly treasuries and corporate bonds, and read nothing else this weekend, read this interview.

One major takeaway is that back in the early 80s, when bonds were out of favor, interest rates were in the teens. Bonds were considered to be a bad investment--demand was low, prices were low, yields were high. Compare that situation to now, when people are rushing into bonds with much, much lower yields. Bond prices are kept high somewhat artificially by the Federal Reserve's buying. The low yields create a unique environment for other asset prices, such as stocks. But many factors are at play and trying to predict the future from singular correlations is a fool's game. 

What I don’t know about the future, we don’t have the time to go into. 

We’re in an Era of ‘Central Bank Worship’ ~ Jim Grant

Jim Grant: We're In An Era Of "Central Bank Worship"

By Henry Bonner of Sprott Global

Jim Grant is the publisher and editor of Grant’s Interest Rate Observer, a bi-monthly newsletter that he founded in 1983, around the time when bonds were considered some of the worst investments – when they yielded 13 to 15 percent.

Rick Rule, Chairman of Sprott US Holdings Inc., often quotes Jim Grant’s description of government bonds as ‘return-free risk.’ (Rick sees US Treasuries as the ‘anti-gold’).

Mr. Grant took my questions on interest rates and the bond market – including Bill Gross’ recent departure from PIMCO – via phone from his Manhattan office.    

Mr. Grant, you argue that companies whose share prices are rising should be becoming more efficient – hence driving down the costs of consumer goods and services.

The Fed is succeeding in keeping both stock market prices and consumer goods prices moving higher – which look like contradictory goals. Do you think this situation is sustainable going forward?

Many years ago, falling prices were a sign of improved efficiency and expanding wealth, and of widening consumer choice. Thanks to the spread of electricity and other such wonders in the final quarter of the 19^th century, prices dwindled year by year at a rate of 1.5% to 2% per year. People didn’t call it deflation – they called it progress. Similarly, in the 1920’s there were advances in production techniques. The prices didn’t decline and didn’t rise. They were stable. Looking back on the 20’s from the vantage point of the 30’s, many people wondered why prices had not fallen. They concluded that it was because the central banks were emitting too much credit, and that credit had served to inflate asset values. It had also pushed the world into a very imbalanced credit and monetary situation towards the close of the 20’s.

Fast forward many generations and here we are today with a world-wide labor market linked through digital technology. We are the beneficiaries of Moore’s law. Nearly every day we see new, wonderful, labor-enhancing machinery coming into the workplace – including new software. And yet, prices don’t fall. They tend to rise, albeit by 1% or 2% per year. Central banks seem to want more than that. You do wonder – I wonder – what would be wrong with what Wall Mart calls ‘everyday low and lower prices.’ People seem to rather relish that – certainly when shopping on the weekends. Central banks want no part of it. So, I see that as a contradiction. What central banking policy has done is to inflate consumer prices that, if the laws of supply and demand were properly functioning, would have tended to fall. At the same time, central bank policy has tended to inflate the prices of stocks, bonds, and income-producing real-estate. Why it is that these immense emissions of new credit by the central banks have not been inflationary? Well, it seems to me that they have been inflationary, because prices are rising not falling.

Do you think that the situation will continue going forward – rising consumer prices along with rising stock prices?

What I don’t know about the future, we don’t have the time to go into. I dare say that stock prices will not continue to rise uninterrupted at the same pace. That’s not a very interesting prediction, but the stock market is certainly a cyclical thing. Stock prices will pull back in the fullness of time, whether it starts 5 minutes, 5 months, or 5 years from now. I think it’s fair to observe that today’s ultra-low interest rates flatter stock market valuations. Stock prices are partly valued based on a discounted flow of dividend income. To the extent that the discount rate you use to value that stream of dividend income, which depends on interest rates, is artificially low, stock prices are artificially high. I think that the burden of proof is on anyone who would assert that we are in a new age of persistently and steadily rising stock prices.

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[Cross-posted at Zero Hedge, h/tip ZH]