Economic Historian Who Predicted 2007 Housing Bubble Warns of Prolonged High Interest Rates

Jim Grant, renowned for his astute observations on Federal Reserve policy and its impact on the economy, has been running the respected newsletter, Grant’s Interest Rate Observer, for over four decades. Notably skeptical and often seen in his trademark bow tie, Grant has made accurate predictions regarding past financial crises, including the Global Financial Crisis. In a recent interview with Fortune, he expresses deep concerns about another impending disaster, driven by the U.S. economy’s decade-long reliance on near-zero interest rates.

Grant contends that the U.S. economy, after a decade of extremely low interest rates, has accrued a substantial debt problem, which is poised to have severe repercussions now that higher interest rates are set to persist. The fallout from the conclusion of the “free money era” is yet to be fully realized, according to Grant.

The “everything bubble” and its consequences:
To understand Grant’s apprehensions, one must revisit 2008, a year he identifies as the beginning of illogical Federal Reserve policy. To aid economic recovery following the Global Financial Crisis (GFC), the Fed maintained near-zero interest rates and initiated quantitative easing (QE), involving the purchase of government bonds and mortgage-backed securities to stimulate lending and investment. These policies collectively created what is colloquially referred to as the “free money” era, injecting trillions of dollars into the economy in the form of low-interest-rate debt.

Grant has persistently argued that the Fed’s post-GFC measures contributed to an “everything bubble,” encompassing stocks, real estate, and various other assets. Despite challenges faced by equities in 2022, a two-year slowdown in real estate, and a regional banking crisis in March, Grant remains concerned that this bubble has only partially deflated.

While the banking and commercial real estate sectors have suffered due to rising interest rates, Grant’s primary concern centers around credit markets. He anticipates that, given the substantial increase in corporate, consumer, and government debt over the past decade, many entities will struggle to service their debt in the current high-interest-rate environment, particularly as economic growth slows. Grant emphasizes that the consequences of a decade of practically free money will manifest in credit markets, highlighting the issue of “zombie companies” that could face difficulties repaying their debt.

Bankruptcies are already on the rise, with 516 corporate bankruptcies recorded through September, surpassing any full year since 2010, according to S&P Global. U.S. business bankruptcies in September increased nearly 30% compared to the previous year, according to federal court data.

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The bubble years:
Grant is not alone in his concerns; several finance experts worry that the free money era has led to economic distortions that have yet to rectify themselves. Mark Spitznagel, founder and chief investment officer of Universa Investments, has characterized the Fed’s post-GFC and pandemic-era policies as creating the “greatest credit bubble in human history.” He believes it’s an experiment that will eventually lead to a credit bubble burst.

Grant’s unique perspective includes his prediction of a prolonged era of high interest rates, potentially lasting a generation. While some anticipate the Fed will start reducing rates in the coming years, Grant foresees an extended period of elevated rates, based on historical monetary policy trends. He underscores the conditional nature of this prediction, emphasizing that if history serves as a guide, interest rates could remain high for a substantial duration. Grant suggests that this new regime began around 2020-2021 and might persist for 40 years, with occasional volatility.

The impact of technology:
Despite Grant’s outlook, proponents of technological advancement argue that technology, particularly AI and robotics, could lead to deflation by significantly enhancing productivity, lowering costs for businesses and consumers. However, Grant remains cautious, stating that while technological progress can be deflationary, it may not be occurring at a pace rapid enough to induce substantial price reductions. He points out that historical periods of significant technological transformation have sometimes coincided with rising prices, challenging the notion of a direct correlation between innovation and deflation.

In conclusion, Grant acknowledges that history isn’t a rigid blueprint, and forecasters should exercise caution. While he provides a historical perspective on interest rates and potential economic scenarios, he emphasizes the need for humility in forecasting, as economic outcomes can be influenced by a multitude of factors.