Jim Grant on interest rate fundamentals

I'll have a look tomorrow. Jim Grant was fun on Wall St. Week. But not a good forecaster of stock prices. Perma-bear.

Impressions 17 minutes in: The lady doing the interviewing apparently has never heard of Thomas Pikkety and his "shocking" formula:

Consider an utterly stationary economy. Joe Sixpack just got married. He and his wife Jane want to start a family. They don't have enough money saved up to buy a house. A house now while Joe and Jane's bodies are optimized for making babies is way more valuable than a house 30 years in the future. Arbitrage is going to happen. And the real rate of interest is going to be more than risk premium as lenders have the option of keeping their gold pieces hidden in a vault or something.

As for James Grant, he's sounding wise, but he has yet to bring up the fundamental dynamic that has allowed the US to borrow trillions at small interest rates.

The declining of interest rates from 1870-1900 are interesting. We had deflation. So real interest rates were not necessarily declining. They might have been quite high.

Yet, the nominal interest rates dropped due to increasing productivity. In other words, we didn't need to inflate the number of green pieces of paper in order to keep up with real economic growth.

Another example would be the early stupendous deflation in the price of computer power in the 80s and 90s. People bought expensive Pong games in the 70s even though they would become incredibly obsolete in a few years. Even after the public understood Moore's Law, people still bought the current generation of computer.

Conversely, I hesitate to buy a new computer in part because Moore's Law no longer holds. Yes, we have bigger CPUs with more heads, but single thread speeds have pretty much topped out and lazy programmers are making computers slower in many respects compared to 20 years ago.

That interviewing lady keeps telling Grant that he believes in a true rate of interest and Grant keeps saying no, politely, and she never changes. Inconceivable!

Anyway, here's the elephant in the room never mentioned: Domestic money growth equals Fed money printed minus the trade deficit. Using that formula for a quantity theory of money might make for an interesting dissertation topic.

As to why we get away with these perpetual trade deficits, part of it is China willing to accept FRNs in return for technology transfer. A huge part is Arab princes needing a safe place to put their oil money. We are Switzerland with nukes.

Also, Trump blew up Iran's nuclear weapons program as much for the benefit of the Sunni Arabs as for the Jews in Israel. And he got promises for well over a trillion dollars in investment in the US in return.

Sidebar on the CPU usage. That's another big sales point for Elixir/Erlang -- the native ability to scale across processors (and networks) due their functional language design. Scalability comes near free.

More on interest rates soon... Thanks for your comments.