‘A Crisis of Money’ Emerges as the Economy’s Central Problem

The following is adapted from the transcript of a recent broadcast:

LARRY KUDLOW, host:

Welcome back to THE KUDLOW REPORT. I’m Larry Kudlow. At the top of this half-hour, legendary financial writer and editor of Grant’s Interest Rate Observer James Grant. He called the bubble in the 2000s; now he’s got some harsh words for Fed head Ben Bernanke’s pump priming and too-easy money policies. He also has an investment strategy for all of us.

JAMES GRANT: Well, thank you, Larry. Nice to be here.

Mr. KUDLOW: All right, well, you do have a great track record, and you did call the bubble in the 2000s. And you said it would bring the system down, and it basically did. So I guess I and others want to know your view, is history repeating itself? Is the Fed making the same mistakes? How do you read gold up and oil up and the dollar down? How do you see it now, Jim?

Mr. GRANT: Well, Larry, I think that the credit crisis has reverted to a crisis of money, so before it was a — the crisis was on the promise to pay money, that was prom — crisis of mortgages and other kind of corporate debt. What we have today is a looming crisis or, indeed, an immediate crisis in the — in the nature of money itself. You know, the very best words spoken about the crisis, the most clarifying words spoken about the crisis to date, I think, were written by a correspondent to the Financial Times of London, who a couple of months ago said, you know, ‘I now understand — I now understand,’ he said, ‘the meaning of quantitative easing, that phrase. I think I get it. What I no longer understand is the meaning of the word "money.’”

Mr. KUDLOW: Hm.

Mr. GRANT: And I — and I think that is the essential difficulty facing us and, indeed, facing all investors.

Mr. KUDLOW: Jim, okay, you blame this principally on Fed policies, on Mr. Bernanke. And I guess the obvious question to ask you is, what advice do you give the Fed? What is to be done about this increasingly serious problem?

Mr. GRANT: I think the difficulty with monetary policy is the nature of the policy itself. We have, over the years, gradually, persistently elided from, you know, a gold standard to a kind of a PhD standard. We have moved from central banking to a species of central planning. And what our well-intended scholar monetary policy Mandarins are about is the manipulation of the economy, manipulation of interest rates, and now the manipulation of the stock market. You know, they had two mandates conferred by Congress, and they unilaterally have taken up a third, which is the levitation of stock prices.

And I think that the first step forward in monetary policy is to clarify ends and means, is to get the Fed out of the business of manipulating things that it shouldn't be manipulating.

Mr. KUDLOW: Would relinking money to gold and perhaps as you, I think, and I know Lewis Lehrman, has argued, to make the dollar convertible back to gold again? Would that be the best way to proceed?

Mr. GRANT: It would. It's the easiest way, and it is— interestingly, it's the most — it’s the most — it is the monetary policy mechanism most in tune with an information age. The gold standard was all about the price mechanism. The Bernanke, or the PhD standard is all about kind of the analog imposition of ideas from the top down. So the gold standard was responsive to price movements. Our monetary policy today is dependent upon the judgment of a clique of monetary policy Mandarins, whose judgment is sometimes right but more often wrong because they are, after all, mortal people. So the gold standard has been billed as something antediluvian, and the idea of returning to it, or moving forward to it, is typically characterized as something quixotic, but on the contrary, it seems to me, this is the most eminently practical step we could begin to discuss. We must begin to discuss it.

Mr. KUDLOW: You know, while you were talking we put a chart up — I believe we got it from your Interest Rate Observer — the absolute collapse of the dollar going back, I don't know, 40 or 50 years. It’s just remarkable how bad that looks. Let me ask you this. As somebody who also believes in relinking the dollar to gold, in your judgment, what would that do to the stock market and the economy? Could we weather that kind of transformation, Jim?

Mr. GRANT: Oh, certainly. I think it depends, of course, how it's done. Lew Lehrman, whom you mentioned, is a — is a great scholar of the history of the gold standard and a great thinker about the prospects for the gold standard, and has a very, I think, simple and compelling program, namely to fix the price at which labor is fully employed, and in which foreign currencies are pegged more or less at purchasing power. Nothing deflationary has to happen with a reconnection of the dollar and gold. On the contrary, it seems to me that the way forward is through the sensible reconnection of dollar — he dollar and gold at price — at levels that will encourage enterprise and raise employment and keep prices more or less steady, but not necessarily perfectly stable. You know, Larry, people talk about price stability without regard to the great improvements in the world. You know, the couple hundred million new willing working hands have come into the world the past 15, 20 years. Digital technology has lowered cost of production, and yet the people at the Fed insist upon suppressing . . .

Mr. KUDLOW: Hm.

Mr. GRANT: . . . what they call deflation, but which we ordinary civilians might well call progress.

Mr. KUDLOW: Hm. You believe that — they're talking about central planning, OK, and the triumph of this sort of Fed omnipressions** (as spoken). Mr. Bernanke told “60 Minutes” that he was 100% confident that he could raise the inflation rate by a little, I guess from 1% to 2% . . .

Mr. GRANT: Yeah.

Mr. KUDLOW: . . . and that's all that’s going to happen. Do you have a thought about that kind of knowledge and planning?

Mr. GRANT: Yes, I do. I do. I'm 100% certain that today is Thursday, that's as far as it goes. Everything else is problemistic***(as spoken). I think that — I’m sure that Mr. Bernanke wishes he had that moment with “60 Minutes” back again, but I think that the unintended, perhaps ill-spoken certitude bespeaks the nature of our monetary methods, which is to superimpose the views of this hyper-educated clique on markets. You know, I — so we have a — we have a PhD standard. Now, I say let us install solid undergraduates with a grounding in the law of unintended consequences.

Mr. KUDLOW: Hm. OK. I like that very much. All right, now, unfortunately we don”t have this gold linkage or gold convertibility, and I want to ask you, if we all have to play the hand that’s dealt us right now, and it’s an easy money hand, what’s your investment advice to people?

Mr. GRANT: I think the big risk, Larry, is that an unscripted burst of inflation materializes. You know, no press release, no trumpets. The Mandarins at the Fed insist — and the — and the central bankers worldwide insist they have the situation under control. They don’t. Events will smother their policies, not their policies control events. So my fear and expectation is that we get inflation that cannot be explained away. Interest rates are not set up for this, and I suspect that a couple of months of very bad inflation data will force our Fed spokespeople to admit, ‘Yes, we do have to tighten money. We do have to raise the funds rate.’ And, you know, the world is —the world is set up increasingly . . .

Mr. KUDLOW: Hm.

Mr. GRANT: . . . for leverage, speculation at very low rates. I think it'll be very bad for financial assets.

Mr. KUDLOW: Bad for financial assets. I think you wrote at some point gold is the refuge right now. And you do mention cheap stocks and undervalued real estate. Do you want to add anything to that?

Mr. GRANT: Well, I think that the best investment — the best investment advice one could get is — takes the form of — I’m afraid a rather tired piece of . . . which is value is paramount. You know, at our conference the other day, the great investor Seth Klarman said that Ben Bernanke is kind of the anti-Benjamin Graham . . .

Mr. KUDLOW: Hm.

Mr. GRANT: . . . Benjamin Graham being the great value investor. For Benjamin Graham, value was everything; price was a way of getting at value.

Mr. KUDLOW: Hm.

Mr. GRANT: For Bernanke, price is everything, and value is an annoyance. Value is what holds prices down. So I think that investors perhaps should keep an extra margin of cash to exploit the opportunities that may well come from an unscripted rise of inflation . . .

Mr. KUDLOW: Right.

Mr. GRANT: . . . that sets off a chain reaction in interest rates and brings values back down to earth. Nothing is sweeter than buying cheap stocks.

Mr. KUDLOW: Hm.

Mr. GRANT: And they do get cheap from time to time.

Mr. KUDLOW: All right. James Grant, we appreciate it very much. Great to see you back on the program. I am grateful.

Mr. GRANT: Thank you, Larry. Nice to see you.

Mr. KUDLOW: Good luck to you.

Mr. Kudlow is a frequent contributor to The New York Sun.