SAURABH MADAAN: Hello, everyone.
My name is Saurabh Madaan.
And I'm very happy
to welcome you
all to the next talk in
our investing series.
I couldn't be more pleased than
to have here in person none
other than James Grant.
Mr. Grant has a lot of
accolades and accomplishments
that I'm going to talk about.
But just to give you a
little bit of a flavor,
he has a fantastic personality
and a charm with one-liners.
He comes up with them magically.
So before this talk, we came
here to this room for the talk.
He was telling me, he said,
I'll explain investing
to you in ones and tens.
And he said,
brilliant investing is
when everybody agrees with you.
And he paused for like five
seconds and said, later.
And today is going
to share with us
a tale of what he calls
the forgotten depression.
The forgotten depression
tells of the slump of 1920
and '21, with high unemployment,
collapse in commodity prices,
upsurge in bankruptcies, and
a sharp break in stock prices.
Unlike the Great
Depression, the 1920 affair
was over in 18 months.
What do you think the
Federal Reserve did?
How much did they lower
interest rates by?
Well, the fact is they
actually raised interest rates.
And this is puzzling, right?
What explains the brevity
of this depression,
considering the actions
of the policymakers?
And Jim is here
to help in person,
to help us unravel
and deconstruct
what really happened
behind the scenes.
So Mr. Grant, James Grant,
is the founder and editor
of Grant's Interest
Rate Observer,
a twice monthly journal
of financial markets.
He is the author of
works of history.
Example-- "Money of the
Mind: Borrowing and Lending
in America from the
Civil War to Michael
Milken," and biographies.
Another example, "John
Adams: Party of One."
His journalism has appeared
in the "Wall Street Journal,"
the "Claremont Review of
Books and Foreign Affairs."
His television appearances
include "60 Minutes,"
"Charlie Rose," and a 10-year
stint on the "Wall Street Week"
with Louis Rukeyser.
So without any further
ado, ladies and gentlemen,
please join me in welcoming
the one and only James Grant.
[APPLAUSE]
JAMES GRANT: Well, I thank you.
And I thank Google, and I
thank the worldwide television
audience.
I'm going to stop
displaying the merchandise.
But thank you for the thought.
May I begin by
inviting you to imagine
that we are removed in time
to the late 17th century.
And it's about 1685.
And you are in a
London coffee house.
And you see two of
your acquaintances.
One is Sir Isaac Newton.
And the other is
Sir William Petty.
No Petty will turn out
to be one of the founders
of modern economics.
And of course,
Newton's reputation
preceded him even then.
Smart cookies, both of them.
Each, as you knew, intuited,
was on the verge of something
wonderful in his
respected discipline.
Imagine now that you, a
citizen of the 17th century,
are transported in time and
in life to the present day.
And you are informed the
physicists have recently
discovered the God particle.
Whereas the economists,
who in 2008 failed
to predict the
biggest cyclical event
of their professional lives,
are debating the efficacy of 0%
rates.
Or is it negative percent rates?
Or is it something else?
Plainly, physics has made a
different kind of contribution
to human society
than economics has.
So I stand before you in
a most unlikely setting
in which to propose the
thesis that in matters
of money and credit, the world
has gone not ahead, but rather
behind.
If there's any audience
institution that
ought to be skeptical of a
claim that progress is not
inevitable and wondrous
and irrepressible,
it surely must this
splendid company.
But nonetheless,
that is my thesis.
I submit to you the progress, at
least in the physical sciences,
is cumulative.
We stand on the
shoulders of giants
in economics and finance.
Progress is rather cyclical.
We go forward.
We go back.
But we keep stepping
on the same rake.
And in the four hours given
to you today so generously
by the company, I'm going
to try to persuade you
that we are, in fact,
stepping on the rake of money.
Now the curious
thing about money,
we spend a-- now
as you can tell,
I'm not an employee of Google.
You might infer by the fact
I did not get the memorandum
about dress today.
On Wall Street.
And people in my
neck of the woods
spend their entire lives trying
to accumulate dollar bills.
But I warrant to you
that not a single one
of my dollar-- I was
going to say grubbing--
my dollar-accumulating
Wall Street friends
has devoted more than a
few minutes in the course
of his or her career to thinking
about the nature of that piece
of paper that he or she has
invested so many heartbeats
in accumulating.
You know, a bond is a
promise to pay money.
You've heard about
bonds, of course.
Debt instruments.
But what is money?
So Chicago Cubs fans-- and now
the world is full of them--
might be wondering
about life the last time
their team was this good.
That was 1908.
Famously, the Cubs have been
unsuccessful since that time.
They won the World
Series in 1908.
And to send out
a marker in time,
I'm going to describe
the financial and credit
arrangements prevailing the
last time the Cubs won the World
Series with the present
day, which is respectively
the next time the Cubs are going
to go someplace besides home
in October.
And the year is 1908.
And here is the way the
world worked with respect
to money and credit.
With regard to
money, the dollar was
defined as a weight
of something tangible.
Gold, $20.67 got you an ounce.
That was written into the law.
The dollar was
convertible into gold
at the option of the holder
of the paper currency.
Such seemed to be the logic of
the constitutional stipulations
about money,
Article 1, Section 8
defined money-- talked
about coining it.
And in that same
constitutional breath,
Congress was given not only
that right, but also the duty
to set weights and measures.
Money was a weight
and a measure.
Money is today something
very different.
It has become an instrument
of national policy.
As to credit in 1908, the
stockholders of a bank
were responsible for
its solvency, which
meant if an institution
became impaired or insolvent,
the stockholders
got a capital call.
That is, the courts
ordered them to fork over
the unpaid in portion of
the par value pro rata.
So if you were a
bank stock investor,
and your bank hit the
rocks, the sheriff
would come calling
if you didn't heed
the first call from the court.
Which seemed to make sense.
After all, you, the
stockholder, got the dividends
when things were going well.
Why shouldn't you be responsible
for the debts of the firm
when things were not going well?
That was then.
Individual responsibility
and credit and money
defined as an objective weight
and an objective measure
in the law.
So fast forward to today.
With respect to banking,
despite or perhaps
indeed a little bit because
of the Dodd-Frank legislation,
even more are the biggest
banks in the country
the responsibilities
of the taxpayers.
Risk to a great degree
has been socialized.
Removed from the province of
individual responsibility.
As to money, what is it exactly?
Well it's not defined.
A dollar is what the mandarins
at the Federal Reserve,
and with the market in
concert with the central banks
choose to make it.
Here is an
observation concerning
the nature of modern money,
central bank-issued money.
So since our sorrows
of 2008, the world
central banks have issued in
the aggregate about $10 trillion
worth of something called money.
I mean, even a gold
bug such as myself
would not disdain to pick
up a hundred dollar bill
if he saw it lying
on the sidewalk.
But note the effort required
to materialize $10 trillion
in purchasing power.
The effort required
is no greater, no less
than that required to tap
in anything on YouTube.
The cost of production
of money is zero.
In times past, the
cost was substantial.
It required human labor
to mine gold and silver.
So the cost of
production is negligible.
The effort to recreate
these units of currency
is negligible.
And we know, I mean,
we somehow know it even
if we don't actually know it.
We're aware that the money
is increasingly pixels.
No weight.
No corporeal substance.
It exists on the hard
drive or in the cloud.
We know that, accept it.
Here is a story about one of
the not insignificant holders
of American common equity,
including Alphabet and Apple
and Exxon Mobil and
Facebook and the like.
The holder in question is
a Swiss National Bank--
the Central Bank of
Switzerland-- the gnome's
own Federal Reserve.
And the Swiss National
Bank, like some sort
of New York hedge fund, files
a 13F form every quarter.
13F form with the SEC
enumerates the filers' holdings
of common stock, give
them some stock by stock.
And the Swiss National
Bank's filing is voluminous.
And you look down, you see
all these individual names.
Owns 100,000 shares
of this, 40,000 shares
of that, a billion to--
where did the Swiss National
Bank get the money to do this?
Why, it created it.
It manufactured it.
It materialized it.
It conjured Swiss
francs with which
to suppress the unwanted
appreciation of the Swiss franc
against the euro.
So it accumulates
euros with francs
that it invents for the purpose.
And with those euros,
it buys dollars.
And with those dollars,
why, it buys your company.
Buy shares in some great
tech companies, not
so great industrial companies.
All manner of companies.
2,600 different names
in the 13F filing.
Now there's nothing
really different.
Common stocks versus bonds.
The World Central Bank have
bought like $10 trillion
worth of bonds.
But to me, the vivid
nature of present day money
conjuring, of materialization
of these units of digital scrip,
these ever so much more
vivid when you think
about something for nothing.
And ladies and
gentlemen, the purchase
of actual interest in
productive American enterprise
is something.
And the currency with which
those shares are purchased
is, in some sense, nothing.
So this talk, as
you can see, has
taken the form of a
lamentation rather than
a really helpful investment talk
with CUSIP numbers and ticker
symbols, and the like.
But I wanted to
emphasize-- I hope
not to the point of ennui--
but still to emphasize
my basic thesis, which is
that we are to a great degree
the unthinking prisoners in
a kind of hall of mirrors.
We are living in the world
of the central banks.
And I only wish that more of
us would speak up and protest.
Like, where is the exit?
How do we get out of here?
What was the movie in
which the protagonist
lived in the world of a TV set?
AUDIENCE: "Truman Show."
JAMES GRANT: Ah, yes.
Right.
Well, that's our world in a way.
We live in a hall of mirrors.
And it's a very pleasurable
hall of mirrors insofar
as asset prices keep
levitating, and the rich
keep getting richer.
Nothing wrong with
that, I suppose,
if one is a member
of that fraternity.
But it is a world of artifice.
Now I claim to you
in the early going
that in this most improbable
setting of progress,
innovation, and to be
sure, of imagination,
that in the very important
realm of finance and credit,
we are not progressing,
but rather retrogressing?
How is such a thing possible?
Well, I invite you
to just to join
with me in a kind of
intellectual or historical
sidebar.
The year is now 2012.
And as I recall, there was
another presidential election.
I can't exactly recall the name
of the Republican candidate.
Something to do with
Romney, I think.
Any case, not
entirely successful.
Before his political failure
became common knowledge,
there was a great
commotion among Republicans
to task the imminent
Romney administration
with the duty of
forming a commission
to study alternatives to present
day monetary arrangements.
That is to say,
let's do something
about the Federal Reserve.
This was called a
Gold Commission.
The idea was to pick out the
best aspects of monetary regime
of yesteryear, and
perhaps to find
a way out of our
delightful-- that
is for the asset portion
holding the community--
our delightful prison.
Our money prison.
And this little thought
bubble of a Gold Commission
was met with polite
smiles and in some cases,
outright derision,
by the savants
of the economics profession,
especially the academic world.
And one of them-- I believe it
might have been Larry Summers--
as long as Republicans
were thinking about gold,
they might as well
investigate the possibilities
of the commission to
bring back witchcraft.
Well, I thought that
was a little abroad.
And it set me thinking
about an essay
by Hugh Trevor Roper
published some time ago.
There's a delightful essay.
I commend it to everyone who
was in the business of improving
the future and of seeing
progress in action.
Namely, everyone in this room.
And it's called
the "European Witch
Craze of the 16th
and 17th Centuries."
And in it, the
author, Trevor Roper,
sends up a warning signal
against the common presumption
that the history of thought
traces a straight line
from the darkness to the light.
Far from it, as he shows
by setting in evidence
the outbreak of quote--
"dark passions and infallible
credulities amidst the
flowering of the Renaissance."
"And the belief in
witches was not,"
Trevor Roper writes,
quote-- "as the prophets
of progress might
suppose, a lingering,
ancient superstition,
only waiting to dissolve.
It was a new explosive
force, constantly
and fearfully expanding
with the passage of time.
Credulity in high
places increased.
Its engines of expression
were made more terrible,
more victims were
sacrificed to it.
The years 1550 to
1600 were worse
than the years 1500 to 1550.
And the years 1600 to
1650, more terrible still.
Nor was the craze
entirely separable
from the intellectual and
spiritual life of those years.
It was forwarded by
the cultivated Pope's,
the Renaissance, by the
great Protestant reformers,
by the saints of the
Counter Reformation,
by the scholars,
lawyers, and churchmen.
If those two centuries
were an age of light,
we have to admit that,
in one respect, at least,
the dark age was
more civilized."
So it is possible,
it is possible
for forward-thinking,
intelligent, and imaginative
people to be in the
thrall of something that's
palpably false.
Could that something
today be the doctrines
of our doctors of economics?
I suggest to you that it is.
I think two winters
ago, I live in New York.
And on a Friday in January,
the National Weather Service
issued a forecast
for a blizzard.
And not just any blizzard.
This was to have
been the greatest
blizzard in the
history of New York
since the arrival of the Dutch.
It's OK by me.
I love blizzards.
And my wife and I
made preparations
for this onslaught.
And we got ourselves
a reservation
at a local restaurant with
a great picture window.
And we arrived Monday, the
day of the forecast, storm
Monday night, to await this
fabulous meteorological light
show.
And as we sat down to dinner
and had a drink and [INAUDIBLE],
we couldn't help but notice
as the evening wore on,
that it wasn't snowing.
And it's a lot to
ask of scientists--
they write all the time--
the storm did land but 50
miles to the East.
But I got to thinking about
the nature of a snowflake,
as beautiful as it is, I guess
I was gonna say, as unique.
It is unique.
What snowflakes don't
do is watch CNBC,
and having imbibed the
forecast, do their best
to confound it through
contrary bloody-minded action.
That's what snowflakes don't do.
But we humans are
exactly in that business.
Sell us something
that's going to happen,
well, we make preparations.
And in the preparation,
we destroy the forecast.
It's not going to happen,
because we have already
taken the action
that was predicted,
and maybe some other
action, besides.
Now this speaks-- the
nature of humanity
and the nature of
prophecy-- speaks directly
to the business model.
The people who make
these trillion dollars
of weightless,
non-corporeal money.
I'm going to a favor
you with a-- the
Federal Reserve has on its
payroll 700 Ph.D. economists.
700.
I'm gonna say that
you need 701 or none.
It's not working.
And to get a taste
of the formative
intellects at the
Federal Reserve,
I invite you to visit
any website that
lists the scholarly
productions of the employees.
Here's one.
Computing dynamic stochastic
general equilibrium bottles
with recursive preferences
and stochastic volatility.
Now if you say those
words separately and read
them backwards, well, the
general dynamic stochastic
equilibria model was the model
in place in 2006 and 2007,
and indeed, in 2003, 4, and 5.
And notice that it did
not set up any knowledge
within the Central Bank of
the oncoming events of 2008.
None.
Now this is relevant,
because the people in charge
are indeed in charge.
They have power.
In particular, they have a
power over this seemingly most
pedestrian thing called
the rate of interest.
I speak perhaps with a
little bit of edge on this.
My publication is called
"Grant's Interest Rate
Observer."
What are we going to see?
There's no more interest rates.
God, interest rates were great.
I remember we had them in 1984.
But we don't have
them much anymore.
They are so small, one
can barely see them.
And in that fact
lies a great deal
of what-- lies much
of what can explain
present-day financial affairs.
You know, interest rates
are prices, critical prices.
We use them to set
investment hurdle rates
and to calibrate risk, and to
discount projected future cash
flows.
They are probably the most
critical prices in finance.
Yet they are under the thumb of
the central banks of the world.
Self-awareness is not
the strongest suit
of our monetary mandarins.
Ben Bernanke-- who now
is working for PIMCO,
is kind of a capital
introduction professional,
he helps people invest in
bonds-- was, as you know,
the Federal Reserve Chairman
before Janet Yellen.
And in the day when
he was in office,
he gave a series of talks
in the public interest at I
think George
Washington University
in the District of Columbia.
And in one of these potted
talks about the modern history
of American economics,
he said, 1971,
that was the year in
which for the first time
in a non-wartime setting,
the federal government
imposed price controls.
A very bad thing.
Terrible thing.
Because after all, he
said in so many words,
prices are the signals, the kind
of traffic signals of a market
economy.
If you make them all red or
all green through federal fiat,
why, the traffic piles
up the intersections.
And that's dangerous
and inefficient.
Prices, he said
in so many words,
must be discovered,
not administered.
This was the man who
went on to execute
quantitative easing and 0%
rates and negative-- well,
now they're talking
about negative rates.
So I think that the critical
failure of the present regime
in money is the conceit
that it is better for us
that prices-- these
critical prices--
be administrative,
rather than discovered.
A long time ago in the annals of
this-- since I started talking.
It seems like a long time.
To me, if not to you.
My host made kind
reference to this product.
And this book is a
history of the Depression
that people generally
don't talk about.
It was the one that
seemingly, as the title
says, with some journalistic
license, healed itself.
The depression healed itself.
The outlines of the
troubles took this format
in industrial production down
about 30% between 1920 and '21.
From peak to trough.
Unemployment certainly
in the double digits.
It was not registered,
but was certainly severe.
Stock market almost
down by half commodity.
Prices down by 40 odd percent.
Corporate profits down 90%.
It was something.
And the government met this
with a balanced budget,
and as you have heard, with
higher, not lower interest
rates.
Which was perhaps a mistake.
But still what
proceeded to happen
was that markets adjusted.
And prices fell.
Wages fell.
And because wages could
fall, profit margins
were restored at lower
levels of selling prices.
So prices came down.
Wages came down too.
Equilibrium was restored at
lower levels of activity.
And because things were cheap,
profit-seeking individuals
sought opportunities.
The sent money here
for that very purpose.
The gold price was fixed.
But the cost of mining it fell.
And because the cost
of mining it fell,
profit margins for
the miners increased.
And they proceeded to produce
more of what in a depression
the world needs more
of, which is money.
So automatic forces, or
quasi-automatic forces
in the marketplace
proceeded to do
what government action in this
particular long-running cycle--
it has been long-running, has it
not-- have so far singly failed
to do.
So in summary, my
lamentation is not
about investing, which I
think is a great calling.
Nor is it about the
United States of America,
which is a pretty
good place to live.
But rather it is the persistent
and-- after the passage
of so much time--
almost unnoticed
substitution of the visible
hand for the much more
effective invisible one that
Adam Smith talked about.
I hope I have not held out
the notion of a free market,
and of a price discovery as
a new kind of garden of Eden.
For it was certainly not in
the '20s, about which I wrote.
This is, after all, humanity
we're talking about.
If things were so easy,
we'd be a great deal richer.
I hope, say in conclusion now.
You look around this
wonderful campus.
You see the fantastic
things that you all
have given to the world.
The world has purchased,
quite properly.
But you wonder where were
our forebears all this time?
Let us imagine that
the year is 45 BC,
or wherever the year
was that Cleopatra died.
And one of her public-spirited,
altruistic handmaidens
made a deposit of the
equivalent of $100
in the Bank of Perpetuity,
buying an eternal CD
to compound a 2% per annum.
And that sum of money, let
us continue to imagine,
were left undisturbed
to present day.
Now that would be something.
Let's see.
This is Google.
We can calculate
this [INAUDIBLE].
I'll do it for you.
And you can join me,
we'll just compare notes
and see what we want to do is
2% compounded annually of 2045.
Let's see.
I'll do it per capita.
7.6 billion people on
the face of the Earth.
Carry the 3.
Yes.
$5.3 billion dollars
per Earthling
if, if, that sum of
money had been left
undisturbed, unlikely probably
during the Black Death.
Somebody might have
made a withdrawal.
And if the Bank of
Perpetuity had in fact
been perpetual, unlikely,
given the nature of leveraged
financial institutions.
They're always toppling
over, aren't they?
And unlikely, given
the very human animal
himself or herself, [INAUDIBLE].
In fact, we're not
that good with money.
But we can be better.
And it seems to
me the way forward
is that a a paradoxical
means of stepping
backward and reclaiming
the institutions that
worked so well the last time
the Cubs won the World Series.
So, that's my speech.
SAURABH MADAAN:
Thank you so much.
[APPLAUSE]
We were having a
brief conversation
before the talk began.
And you shared a couple
anecdotes, which I thought
would be very interesting
for this audience.
So let me start
with one, if I may.
You guys got a shout out in
the movie, "The Big Short."
And you were mentioning to
me that during those days,
you got a big pile of
documents in the mail.
And you had a chemical
engineer working with you.
And you asked him, what did
you make out of this material?
And they said, I
didn't understand it.
And your reaction was--
JAMES GRANT: Yeah.
We got a story.
No.
It didn't make any sense to us.
His name is Dan Gertner.
And a very smart guy.
And as you said, a chemical
engineer from his earlier life.
And by no means
intimidated by complexity.
And these documents
run thousands of pages.
Very complex.
But knowing that we didn't know,
knowing there was something
wrong, set us on the road to
persistence, which is always
a good road to be on, unless it
winds up at a dead end, which
sometimes happens too.
But we persisted and looked
at more of these things.
And came to see that there
was actually no there there.
And one of the ways
in which we came
to understand that
we're on the right track
is the pushback and
the friction that we
encountered on Wall Street
from the stories we wrote.
SAURABH MADAAN: They
were hostile to you?
JAMES GRANT: Well, they
were-- well, hostile-- yeah.
They were.
Well, if we had
been wrong, it would
have been Gertner's fault.
But as it were, we were right.
So.
But once we were summoned
over to a friendly talking
to at Standard & Poor's-- the
rating agency who wanted us
to understand as to
how very wrong we were,
and how unhelpful we were
being to the situation.
And then we really
knew we were right.
SAURABH MADAAN: So did
additional evidence come in
and help you refine the theory?
Like, what are some signals?
And the reason I'm asking is, in
terms of a lot of your audience
here and on the
video on YouTube is
going to be people who are
engaged in investing, possibly.
Like, is there some
sort of pattern
recognition that one can
employ to be cautious?
JAMES GRANT: Well, it's a
wonderful question to which
there really is no answer.
One sees recurring
patterns in finance.
I think with respect
to the Federal Reserve,
to the central banks,
to the nature of money,
to interest rates, I
think there is setting up
one of the great dramatic
moments in finance.
There are upwards of $9
trillion worth of securities
in the world that yield
less than nothing.
These are debt
instruments, promises
to pay money undefined.
And you, the investor,
pay the issuer
for the privilege of-- you
could say this as many times
as you want.
It still won't make any sense.
And I think I have in my
very hand, I have-- yes I do.
I have a quotation from
"The Financial Times,"
a very distinguished
London newspaper, that
distills the mindset
of the market
today with respect to
investing in fixed income.
Quote-- this is from
April 15 edition.
Quote-- "Some banks,
pension funds, and insurers
must buy safe government debt
irrespective of the price."
Close quote.
Now is any investment
asset intrinsically safe?
Is it intrinsically anything?
I mean, let me invite you
to go back in time, 1984.
1984.
So interest rates spent the
years 1946 to 1981 going up.
It went from 2 and 1/2% at
the low in the spring of 1946,
to 15% in the fall of 1981.
15%.
You could have invested in 15%
30-year US Treasury securities
non call for 25 years.
Equity returns with
no equity risk.
You know who wanted that?
About nobody.
Because they had had
35 years of experience
with falling bond prices
and rising interest rates,
meaning losses.
So interest rates
began to come down.
Paul Volcker was in at the
head of the Federal Reserve.
And it seems as if
he were making good
on his vow to kill
inflation dead
through the mighty, blunt-edged
instrument of tight money.
It seems as if he were on
his way to achieving this.
And then comes the
spring of 1984.
And for whatever
set of reasons--
and there are always
pretexts on Wall Street.
You can always make a story
about why something happened.
But what did happen
is that interest rates
went back up again.
And for just a moment
in the spring of 1984,
not so many years
ago, you could have
invested at 14% for 25 years
in US Treasury securities.
That was what Wall Street
calls the Retest of the Lows.
A return to the low F
price, the high F yield.
That was on offer
in the spring '94.
And again, very few takers.
I was there.
And we chronicled this.
You couldn't be sure.
You thought-- nobody knew that
a new cycle in interest rates
would last more than 30
years, which this one has.
1981 to date of very low rates.
And now people can't
get enough of securities
in which you pay them.
So yes.
We've got pattern recognition.
Yeah.
And one of the patterns that
recurs is extremes of behavior
and perception that
you feel are almost
supernatural in their error.
You can't believe.
People in 1979, '80,
'81, were watching
bond yields go up from 9%, 10%.
When Volcker came
in, October 6, 1979,
he gives a talk, a
press conference.
It's a Saturday.
Emergency meeting on Saturday.
And he announces that owing
to the crisis of inflation
and of the dollar, that
he, Volcker, personally
is going to oversee
the tightening of money
such that he is going to
ring inflation by its neck.
Or words to that effect.
So that was the
announcement of intent.
At that moment, long-dated
treasuries were yielding 9%.
As I say, by the
time he demonstrated
to the satisfaction of
the investment community
that he was serious,
they went to 15%.
That was the degree of
mistrust of the institution
of central banking
in the early 1980s.
Compare and contrast
the present day.
The economists at the Fed,
to a man and to a woman,
virtually, missed, as I
say, the biggest event
of their professional lives.
Yet they have come
out of this crisis
with greater power, greater
regulatory power, greater power
over interest rates.
They have been the
instruments of the levitation
of financial assets
through their talk
and through their actions.
Stock prices have
gone up and up.
Cap rates on real estate
come down and down.
Interest rates down and down.
The world of assets
thanks them profusely.
But it's a truism that the
future promises lower returns
the higher the price
in the present.
It's a truism that is hard to
act upon if you're an investor.
God, it feels good
when it's going up.
SAURABH MADAAN: Charlie Munger
says something that cannot go
on forever has to
come to an end.
JAMES GRANT: What does he mean?
Well, that is entirely true.
But I'm here to tell you--
I think Charlie's got
a few years on me.
But I've been in situations,
and have been wrong enough
on some things that it seems
if things can't go on forever,
can and do.
SAURABH MADAAN: So
you've powerfully
made the point of the so-called
invisible hand becoming
very visible.
And you also refer to one
of the previous presidential
campaigns.
What's the solution?
Some say break up the big banks.
Others have other
solutions proposed.
What do you think
is the way out?
JAMES GRANT: I think
constructive retrogression
in our institutions.
What I would like to see
is, first and foremost,
individual responsibility
being restored to Wall Street.
There's one
financial institution
in New York City that did not
take money from the Treasury,
took no TARP money, took
no bailout of any kind,
and was virtually
invisible in 2008.
That was Brown
Brothers Harriman,
which was founded about
the time that Citibank was.
My brother has a
general partnership
in the organization, meaning
that the general partners are
themselves personally
responsible
in a pro rata fashion for
the debts of the firm.
Means not just that
their stock goes to zero,
but they lose their Matisse,
their golden retriever,
their house, everything.
SAURABH MADAAN: They
have skin in the game.
More than that.
JAMES GRANT: Yeah.
So it would be nice,
to my mind, to go back
to stockholders' liability.
But without being
punitive, one should
insist the people who
enjoy the upside ought
to be personally responsible, in
a leveraged financial setting,
for the downside.
The downside not just affects
them, but affects all of us.
So number one I
think, is to get away
from socialized risk,
which I think is
corrupting to the Republicans.
I mean, it's
corrupting to finance.
And then I think we have to get
away from the Ph.D. standard
of monetary management, the
discretionary rule by people,
who as well-intended and as
well-credentialed as they are,
are the practitioners
of a pseudo science.
I mean, they say for instance,
they say for instance,
the prices must go up 2% a year.
That's the verdict of the
people who run monetary?
Why?
Why?
Who says?
Oh, they say.
But they don't explain.
Is it just not possible that
by creating the extra credit
with which to try to force
prices in general higher,
they create an
increment of credit
that does great damage to the
structure of things in finance
and in the real world.
I mean, is it possible
that by doing this,
they create bubbles
in real estate?
In San Francisco
and in New York,
real estate values are back
to levels from which they
plummeted in 2006 and '07.
So is this really
the way forward?
This command and control regime.
You know, people tax the
proponents of new gold
standard.
They tax them with,
it is an anachronism.
Well, it does sound
as if it were.
Why not bring back the
cutthroat rays of the sexton?
Except there is a rather
subtle distinction
between things and methods,
as in methods and money.
the gold standard is about
a defined monetary unit
that is a weight and a measure.
And around that defined
weight and a measure,
people, through collaborative
means and markets,
through the social
media of markets,
work out their own salvation.
Now that sounds kind
of contemporary, right?
And if you casted the
present-day arrangements
as command and
control, one thinks
not of the enlightened
21st century,
but rather of say, Poland
in 1957, or something.
Right?
That's command and control.
So I would say the
anachronism is really
on the part of those
who would defend rule
by these-- I think they are
intellectual pretenders.
And I think it's high time
that smart people began
to look into the science of
economics and say, or what?
What are we talking about?
If the rigor of science have to
do with its predictive value,
and if you missed the biggest
snowstorm not by 50 miles,
but by 5,000 miles,
shouldn't we at least
have congressional hearing?
SAURABH MADAAN: I mean, I'm
going to try and lighten up
the mood here a little bit.
JAMES GRANT: No.
This is good.
SAURABH MADAAN: I know
you're all fired up.
So I was asking you
about your-- you
had a degree in
international affairs.
JAMES GRANT: I did.
Talk about pretense.
SAURABH MADAAN: No MBA, right?
JAMES GRANT: No.
SAURABH MADAAN: No MBA.
JAMES GRANT: I'm like the
guy in Nashville who says,
can you read music?
No.
That doesn't hold me back.
SAURABH MADAAN:
So when I ask you,
how did one thing
lead to another?
And where you are?
And you asked me-- I
grew up in North India.
And he retorted.
He said, what did you
think were the odds of you
working in a company in
Sunnyvale called Alphabet?
And so you were talking
about serendipity.
Right?
And you also mentioned
to me that there's
this huge obsession
about longevity
at the risk of quality
and happiness in life.
What did you mean by that?
JAMES GRANT: Well, I'm
going to-- unless it's
a breach of copyright.
I'm very sensitive on
copyright, actually.
But I will investigate
the copyright implications
of my promise to
forward you a piece that
appeared in "The London
Spectator" a couple of weeks
ago.
It was a marvelous piece.
It was written by an
octogenarian, I think,
who said that here he
is, having achieved
the modern be all
and end all, which is
to have achieved a certain age.
He has not died,
and is biblically
allotted 3 score and 10.
But he has lived beyond that.
Maybe he might be 90.
And he says, by the
way, it's not so hot.
And he enumerates his
ailments and his infirmities
and his deficiencies.
And he says, to
young people, no.
Eat, drink, and be merry.
Know that-- and he's not
talking about debauch.
He's talking about
living in the moment
without a contemporary
obsession with things
that if you were unlucky, will
land you at the age of 97.
In closing, he said a very,
very powerful line or two.
Like he said, when I look
back at my life, he say,
the things that make me
smile, the things that gave me
pleasure were when I drank
too much, and smoked too much,
and climbed too high, and fell
too far, and tried too hard.
So go for it, Google.
SAURABH MADAAN: Thank you.
This is fantastic.
So we're open for
questions, folks.
JAMES GRANT: Yeah.
AUDIENCE: Thank you,
Mr. Grant for coming
to speak to us today.
So a few days ago, maybe a
couple days ago, Donald Trump
talked about essentially
defaulting on
like US government debt.
And I was kind of surprised
that the markets didn't seem
to react at all to that at all.
Do you think that as we get
closer to a possible Trump
presidency, that this
might actually sort
of slay one of the sacred cows?
JAMES GRANT: Well, Donald
Trump speaks with authority
in the matter of default.
[LAUGHTER]
Dozens of companies,
of course, hundreds
have defaulted once
in modern times.
Many fewer have defaulted twice.
Many fewer still,
three and four times.
Trump's Resort and
Casino in Atlantic City
holds the indoor record for
having defaulted five times.
So this man speaks with
authority on the matter.
Now by way of
historical preface,
the United States has defaulted.
We defaulted on promise
to pay our debts
in gold in 1933 and '34.
That was known in the city of
London as the American Default.
And again in 1971,
when Nixon said
that no more would be honor
promises to redeem dollars
at $35 to the ounce of gold.
So that was default number two.
And there is a default built
into the monetary method
of trying to achieve
2% inflation per year
over the course
of a 30-year bond.
Of course, 2% loss of purchasing
power every year adds up.
And you're not looking
at much in the way
of return in purchasing power.
So the default is
a defined term.
Now, I think apropo of Donald
Trump's remarks on Monday, sir,
you have to keep up.
He recanted that on
Monday afternoon.
Every day's a new adventure
in his policy making.
But he's all about negotiating.
So I don't know.
I mean the way to think about
the American public debt,
I suggest you visit the
Cato Institute website.
There's a free analysis
available by a very good
thinker named Jeffrey Miron.
M-I-R-O-N.
And in this analysis,
he says, let's
take the present value of
American government promises
to pay, that is, the
policies in place
now, especially medical
care, social security.
Let us assume those go forward
as now budgeted for 75 years.
And let us compare the
present value of expected tax
revenues using
assumptions, which
of course, might be errant.
And compare those to the present
value of expected outlays
and the present value
of expected income
for the government.
And the difference in the
present value is $120 trillion.
That's the whole.
So that's what they call them.
The trade unsustainable,
unless something is done.
Now Donald Trump wants
more medical care.
He wants-- to make America
great, you have to be healthy.
So he wants more of this stuff.
And I dare say that his likely
democratic sparring partner
is going to want more as well.
So the question to
me about default
is rather more nuanced than
the Trump Resort and Casino
simply not paying and
getting really clever lawyers
to rewrite the covenants.
But I think that some
adjustment in our debt burden
is in our future.
Either through-- I don't
know-- through something.
Perhaps through inflation, or
perhaps through negotiation.
AUDIENCE: How do you feel
about an audit of the Fed?
And if that were to happen,
what are your hopes or fears
about what might be discovered
and what action might
be taken as a result of that?
JAMES GRANT: I think the audit
ought to look at not only
the balance sheet and the
finances, which I guess
are kind of OK.
Although awfully big.
Trillions upon trillions.
But I think an audit ought
to go into the assumptions
and the analyses that
inform the Fed's actions.
I think the more sunlight on
this institution, the better.
I mean, the Fed ought to be
regarded as a vast government
monopoly.
And what every monopoly
needs is competition.
So as much I'd like to
see an audit for the Fed,
I would also like to see a
simple change in the tax system
such that silver and gold would
not be taxed as a collectible,
but rather we treat it as money
in the tax system, whereby
gold could compete in the open
market for monetary allegiance.
There's a company called
Gold Money, which is
kind of like a bitcoin thing.
And it's a very small caliber
enterprise at the moment.
But why not give it a chance?
Let's see what people choose.
So yes.
The Fed, more sunlight the
better, and competition please.
AUDIENCE: Yeah.
I know a lot of the
liberal intelligentsia,
like Lawrence Summers, make
fun of the gold standard
and compare it to witchcraft.
And I'm curious how in practice
would you bring it back?
What would be the
steps you would take?
What would be the
outcomes, et cetera?
JAMES GRANT: It's
a big question.
And I won't tax you
and the audience
with details which
I'm not sure I can
do a very good job explaining.
But I think the essence would
be to define money as a material
object, as a weight
and a measure,
and to fix currency
values internationally.
So you have to coordinate
among the leading countries
and to restore fixed exchange
rates, which after all, were
they regime in place
from the founding--
really in this country,
the founding to 1971.
Our experience with
pure fiat currency
and with floating exchange
rates dates only really to 1971.
So it's a very small experiment
in the long-running history
of money.
I think a lot of
people are hung up
on the evident anachronism
of people walking around
with a bunch of gold
in their pocket.
And they wouldn't.
Even in the 19th
century, they didn't.
Bank notes where
portable, light.
There was a panic in the
city of London in 1825.
And the authorities, to
intervene and to quell this,
gave the Bank of
England permission
to issue one pound notes.
Previously they
could not do that.
The only sovereign
gold coins, one pound,
were each little tiny things.
And people were glad for it.
And they didn't
really-- what gold does
is to serve to anchor value.
And in this day and
age, when your phone
is your bank and your
brokerage account,
and so many other things,
you could deal in gold
electronically.
It's infinitely
divisible in weight.
It's one of its many
monetary features.
So I think what
gold would do would
be-- what the effect
would be would
be to create an objective value
around which prices would move,
rather than now changing
the value of money
so that prices and wages
don't have to move.
Now that would be a change that
the American people would have
to choose to accept or not.
It's rather a big change.
But we have borne seven or eight
years of this sleepwalking, 1
and 1/2% growth.
There's something wrong.
And I think in the
course of auditing
the Fed, let's audit
our intellects.
Let us audit the ideas
by which we live,
and see if we can't do better.
I think at least some
serious investigation
into the nature of money
and nature of credit
might help us improve our lots.
AUDIENCE: Do you think Ron
Paul has been suppressed
by the powers that be?
Cause well, I mean, this is what
he speaks, as you well know.
JAMES GRANT: Right.
AUDIENCE: Because
he would want you
to be in his administration.
So.
JAMES GRANT: We fell a
couple of electoral votes
short on that one.
AUDIENCE: I realize that.
I realize that.
But he was going
to have one, right?
So my question is,
I lived overseas
in Europe for many years.
You couldn't even get any
information on Ron Paul there.
I was an English teacher at
the time for bankers, actually.
And they wanted
to know about him.
But even here in
America, he gets
a lot of people who
want following him.
But the media squelches him.
JAMES GRANT: Well,
I think Ron Paul
is regarded in the
mainstream media as a crank.
That is a fact.
But one of the things that the
World Wide Web has opened up
is alternative methods of media,
of journalism, of information.
And trying to suppress
something-- I mean,
I guess Facebook maybe is
trending the wrong things.
I read in the paper.
But I think that is evidence.
And I think the world finds out.
I think that people
know everything they
want to know about Ron Paul.
I don't think it's a
conspiracy of silence.
I think there is a
blockheaded misperception
of the way our financial
affairs are ordered,
and the ideas that inform them.
And so how do you
deal with that?
I think you get better ideas.
You get up off your duff
and try to make things
better, which doesn't sound very
imminently successful, does it?
But in short, I
don't think there's
a program against Ron Paul
I think Ron Paul personally
is actually irrepressible.
SAURABH MADAAN: Jim, thank you
so much for being so candid
and sharing your
thoughts with us.
We appreciate it very much.
JAMES GRANT: Thank you.
[APPLAUSE]
