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 spoke to Mr. Grant about the spotty track record of central bankers, deflation, gold, and the gold standard, as well as negative interest rates and a ban on cash.
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.
Fed Alternatives
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.
Epoch Times: How would it work in practice?
Mr. Grant: Money would be defined as a weight of something, a weight of gold and you would be able to exchange your governmentally issued currency for that weight of gold on demand.
Another way of thinking about it is to simply remove the sales tax from gold, which now makes it prohibitive as a monetary medium or, at least, unwieldy as a monetary medium, as a practical monetary medium, and letting the market come to its own best solution as to the institution of money.
I’m more and more thinking that may be the way forward. It’s not to impose from on high a gold standard as we had in the days before 1914. I think that worked very well indeed.
But better allow the far-ranging minds of entrepreneurs to come up with a kind of money that combines the stored-value function with ease of transaction function.
I think gold has something to offer in either case. I think it almost seems to be uniquely designed by nature for a monetary function. It’s never destroyed and it’s a wonderful material for money. It’s almost infinitely reducible in volume.
No one year’s output of gold is likely to change the supply of gold because the stuff is never destroyed. Cleopatra’s fillings are somewhere on this planet. I think what may sound like a quixotic idea, I think that the world will having investigated this experiment in improvisation, the world will come around to wanting something more permanent and settled and this goes for exchange rates as well.
I think this experiment in manipulated and moveable exchange rates is going to end badly. I think we will finally arrive at a world of fixed exchange rates and fixed monetary values.
Epoch Times: What is the most likely scenario?
Mr. Grant: I’m thinking that the outcome is going to be a set of fixed exchange rates and a stable dollar defined as a weight of something, and something might be gold. If you ask me how the world is going to evolve, I would guess, guess, that it would be moving towards the thing that it has turned its back on now.
Namely, I mean fixed exchange rates and certainty to the value of currencies, one against the other as opposed to speculation and manipulation. That and units of currency denominated into something defined as a physical weight rather than as something that is cooked-up by a committee of the government’s appointment.
People smirk and laugh when you talk about the gold standard. First of all, it’s anachronistic. We tried that! Well, tell me, what is more anachronistic than command and control? That’s like something out of Poland in the 1950’s. So the idea of a federal open marketing committee determining in its own councils, what ought to be the clearing market interest rate in the dollar-denominated world is to me, on its face, an absurdity.
Epoch Times: How would you determine interest rates in that system?
Mr. Grant: The interest rates would be determined in the marketplace. During the classical era of the gold standard from 1880 to 1914, there were central banks of course, except in the United States. In the United States, some money center banks discharged some of the functions of central banks.
In those times, the central banks set discount rates at which they would take in commercial paper or discount it, and otherwise, market rates were set in the market. Central banks took a hands-off approach to bond yields and market interest rates. They were very low but they were very low because inflation was low, as were what they now call inflation expectations. I’m not sure how the 21st-century variation is going to work out.
I feel sure that a better way to discover interest rates would be to discover them. It’s what we call price discovery. That’s what markets do, they discover prices through the myriad interactions of buyers and sellers.
Increasingly over the past many years, especially since 2007, financial values have been administered both through direct action and especially through the power of suggestion and the implantation of ideas and the manipulation of psychology and expectation by central banks.
So you ask, “Who should determine interest rates?” and I say they should be discovered.
