James Grant on the Folly of Central Banking and the Need for a New Gold Standard
NEW YORK—James Grant needs no introduction. The chief editor of Grant’s Interest Rate Observer has been an eloquent observer and astute analyst of markets since he started his Barron’s column “Current Yield” in the late 1970s.
Grant recently won the Hayek Prize of the Manhattan Institute for his most recent book “The Forgotten Depression,” and the Gerald Loeb Lifetime Achievement Award.
Epoch Times: Last time we spoke in 2014 you were skeptical of the stock market’s rise, but didn’t want to call a top. What about now?
James Grant: Yes, the stock market is having a rough day of it.
The Fed was more than happy to dragoon the financial markets into its plan of inducing higher consumption through higher asset prices. The thinking was by creating so-called stimulus—that is, low-interest rates and a great deal of dollar bills, real estate values would go up; stock prices would rise; interest rates would fall and people, being wealthier on paper, would feel wealthy enough to spend. And that was the theory. The grand design called the portfolio-balance channel effect. Very technical.
And indeed, real estate prices went up, stock prices went up. Bond yields went down. Even junk bond yields went down to as low as 5 percent in 2014 or 2015. What’s happening now is that the markets are saying “enough.” Instead of a wealth effect, there is a reverse wealth effect.
Part of our problems stems from the attempts of the central bank to expropriate the formerly free market for some macroeconomic policy agenda with the result of distorting prices and thereby distorting the nerve endings in finance that tell you what’s risky and what’s not. So I think that is the remote cause of some of our difficulties, the adulteration of interest rates, of markets, and, therefore, the distortion of judgment.
Epoch Times: Judgement is coming back and people are waking up now.
Mr. Grant: It’s not just waking up, it’s also the laws of arithmetic at work.
I think this collapse in the price of oil and base metals and other commodities is forcing leveraged, encumbered producers to retrench and there have been domino effects the world over, as we all know. So it wasn’t just a kind of agonized reappraisal on the part of markets, a coming to terms of awakening. It was a forced awakening having to deal with very real, arithmetic problems confronting people in the shape of lower prices and higher real debts.
Epoch Times: This is the classic debt deflation happening in the commodity sector now
Mr. Grant: I think this is important to distinguish when you’re talking about falling prices. On the one hand, there is debt under pressure, which has the cause of forcing people to sell things to pay interest and principal. The company has borrowed too much money and if the prices of the things it sells go down, that company is liable to sell more of those things, even at lower prices just to keep the bankers at bay and to remain solvent. So debt drives production.
So in a world of desperate and troubled debts, prices tend to fall. Labor tends to get discharged and or wages tend to fall. Inventories get liquidated, therefore, more material is thrown on the market and that lowers prices. This is a deflationary spiral and some of that is happening now.
But where our central bankers are perennially confused is with the benign effects of new technology causing prices to fall. We might call this progress and they have set their faces against that kind of so-called deflation.
The way they’ve done that is to create enough credit to raise up the general level of prices by their hoped-for 2 percent a year. So the central bankers create enough credit to distort prices and asset values as they make them higher than they would otherwise be.
Epoch Times: Normally if prices decline because of productivity increases and advancement in technology, it’s a good thing.
Mr. Grant: You would think so, but not for the central bankers. Have you ever heard one make that distinction between the kind of falling prices we Americans seek out every weekend while shopping on the one hand, versus the manifestly scary kind that has to do with the liquidation of debts?
The central bankers are silent as to that distinction. As to whether they’re oblivious to it, I don’t know. But they are silent to that ever critical distinction.
Epoch Times: So here we are in the debt-deflation scenario, which the Fed helped create because they raised interest rates last December.
Mr. Grant: Well the rate hike crystallized a movement in interest rates that was underway for a while. The rate hike was, I think significant, but not for the 25 seemingly insignificant basis points, or one-quarter of one percent.
I think the world was rather poised or teetering on a kind of debt problem then which was precipitated by the problems in China and by the collapse in oil prices.
It seems to me that Janet Yellen and her confreres at the Federal Reserve simply missed their mark. They might’ve raised rates but didn’t in 2014 or 2013 and meanwhile … the economic situation weakened in 2015.
The Fed, having been on record as wanting to raise rates in 2015, having invested some measure of its prestige in following through finally, almost as a mercy to us who were tired of listening to it, chose to raise that one little rate one little quarter of one percent in December.
And then announced in its self-satisfaction that there’s going to be four more of these moves. “But four more? Four more moves in this world?” said the market to itself. To me, the failure of this is a demonstration of the failure of the very institution of discretionary management of monetary affairs by this hand-picked or not quite self-selected, but certainly like-minded, former tenured economics professors who run monetary policy.
It’s a failure on their part and of their methods. They contend, virtually, that they can see the future and prove it before it comes to pass through dexterous manipulation of the market and this or that interest rate.
Epoch Times: You have been critical of Federal Reserve policy for quite some time.
Mr. Grant: I’ve been critical since 1914. I didn’t like it when it was founded. I don’t like it any more today.
Epoch Times: What kind of alternatives do we have to the Federal Reserve System?
Mr. Grant: Well, we might think about, for a start, letting interest rates find their level without the intervention of the authorities. The technique of price control is generally regarded as one of the oldest failures in the history of economic policy. It’s been around off and on for millennia.
There are records of it in ancient civilizations: It never worked. People for some reason, I can’t fathom, have refused to draw the analogy between the attempts to manipulate asset values and the institution, of the thoroughly discredited institution of price control. But that’s what we have in all but name.
I do think that money ought to be not a magic wand manipulated by some to produce unusual, or almost supernatural outcomes in the world of commerce and business. Money is not that. Money is not a magic wand.
It is a measuring stick and it ought to be an objective and steady measuring stick, not manipulated by anyone. It seems to me in the history of money that the gold standard has worked best among many imperfect alternatives.
One sounds utterly anachronistic, to use a gentle word in espousing this idea when one mostly sounds like a crank. But it is my continuing conviction by the time this is all over, by the time the experiment with the Ph.D. standard (the rule of monetary affairs by former tenured faculty members) has ended, the gold standard will look much less anachronistic and much more desirable than it does today.