Wimping Out
James Grant, 12.26.05, 12:00 AM ET
Don't raise rates, or else. Almost those very words were recently hurled at a central banker by a politician. Creditors of the world should be afraid for their capital. Hidenao Nakagawa, policy chief of ruling Liberal Democratic Party, happens to be Japanese, but he spoke for politicians everywhere. Yes, Japan's statesmen will say, they revere their nation's scientifically managed and politically disinterested central bank. Still, they would revere it not one whit less if the central bank forbore from raising interest rates.
When the Bank of Japan issued a warning recently that it is preparing to tighten policy, Nakagawa let fly. "The bank has no independence when it comes to policy targets," he said. "If it does not understand this, we need to consider amending the Bank of Japan law." To many Japanese politicians, including the prime minister himself, the world's second-largest economy is too feeble to bear the burden of an overnight interest rate even a little higher than the currently prevailing 0%.
Political pressure on central bankers comes from all sides, even from the Grand Duchy of Luxembourg. In late November the Luxembourg prime minister, Jean-Claude Juncker, put a question to the president of the European Central Bank, Jean-Claude Trichet. The latter had announced that the bank was going to raise the current 2% rate (which he did on Dec. 1, to 2.25%).
Come again? demanded Juncker, who sits at the head of a council of 12 European finance ministers. The 2005 surge in oil prices has induced no spike in wages and nonenergy prices, Juncker observed.
Whereupon Trichet, in testimony before the European Parliament in Brussels, seemed to wobble. Yes, the rate might go up once or twice, the central banker said, although probably not a lot more. Trichet extended this olive branch even though European inflation and European monetary growth are both running above the bank's guidelines: 2.5% versus 2% and 8.5% versus 4.5%, respectively.
And as in Japan and Europe, so in the U.S. Just before Thanksgiving the Federal Reserve indicated that it might be nearing the end of its own rate-raising campaign. If true, the overnight money market interest (now 4%) would come to rest substantially below the rise in the Consumer Price Index for the 12 months to October (4.7%).
When interest rates were falling and inflation was subsiding for most of the past quarter-century, the reputation of the world's central bankers was inflating. No more the bungling authors of the Great Inflation of the 1970s, the likes of Trichet (and, of course, Alan Greenspan) were triumphantly rehabilitated. In April the government of France was able to borrow for 50 years at 4% in euros, a currency that has been in physical existence for only four years. Has any prettier compliment ever been paid to a steward of paper money?
"Monetary policy needs to be forward-looking," said Rachel Lomax, deputy governor of the Bank of England, in a March speech, "because interest rates act with a lag. No monetary policymaker can avoid taking a view of the future." The British central banker's words sum up the difference between Warren Buffett, appraiser of values, and Alan Greenspan, stargazer.
Instead of guessing about the future, value-minded investors observe the present, in company-specific terms: What is a business worth? What does it own, and what does it owe? What does it earn? They invest in what they can see, not in what they imagine they can predict.
The world over, measured inflation rates are running neck-and-neck with nominal interest rates. It's a race that interest rates are bound to lose. At the very least, no saver listening carefully to the noises emanating from governments and central banks can harbor much optimism about earning a satisfactory inflation-adjusted rate of return.
This fact helps to explain the broadening reach of the bull market for gold. In recent months bullion has raced to new highs in terms of yen, euros and dollars. Even as bondholders continue to settle for pygmy-size yields, a much smaller cohort of investors is choosing to exit any and all currencies in favor of the legacy monetary asset, gold.
If the majority ruled in investments, the nod would have to go to the bondholders. But not infrequently in markets it's the enlightened minority that carries away the prize.
As for me I continue to buy Krugerrands--South African gold coins--and salt them away in a safe deposit box. My hope is that, mushroom fashion, they will thrive in the dark. I am speculating, of course. Gold has no price/earnings ratio. Nevertheless, I draw comfort from the knowledge that I'm speculating against those government employees called central bankers. |
