James (Jim) Grant, founder and publisher of Grant's Interest Rate Observer newsletter, sat down with me to discuss valuations in biotech, the most reviled company in Russia, and how much The Untitled Burrito costs. A video and transcript of our conversation follows.
Steve Forbes: Jim, good to have you with us.
James Grant: Thank you, Steve. Good to be here.
Forbes: Tell us, what is going on? We've had the worst recovery from a sharp downturn in U.S. history. Yet the monetary base has exploded far in excess of what it did in the '70s and yet we haven't had an explosion, at least in the Consumer Price Index. Gold is down from its highs of three years ago. Stocks are at a record high. What you call the taper tantrum, now the markets are in seeming calm about that. So what in the world is happening?
Top 10 Construction Stocks For 2015
Grant: Well, I think first and foremost the patient is overmedicated. That is, the economic patient. Stimulus, by the bottleful, by the prescription fill, gradually and by degree are (and I guess not so gradually) the Federal Reserve has moved to substitute price administration for price discovery. And it seems to me that the Fed's kind of full-court pressed (to switch metaphors) on financial markets and pricing thereof has induced a deep complacency with respect to financial assets and has also introduced a sharp degree of optimism or what we might call even inflation in the financial markets.
I certainly can't explain why, to date, no such inflation has been visible or very little has been visible in the consumer realm. But you know one would almost expect that in this day and age of miraculous digital enhancements to everything we do and the related improvements and the efficiency of production that prices would, in the absence of these monetary insertions, actually fall, or at least dwindle a little bit. So I suppose that a little bit of inflation is itself an anomaly one ought to have seen, kind of a dividend for the working guy in the shape of low and everyday lower prices.
SEE ALSO: Buy Steve Forbes' New Book MONEY at Amazon, Barnes & Noble and IndieBound.
Forbes: Just to put that in perspective. Somebody pointed out if you tried to create the iPhone in 1990, it would cost $3.5 million.
Grant: Right. It's less today.
Forbes: Huge deflation.
Grant: We've seen this before, of course, in many different ages of American economic history. The late 19th century was a time of persistently dwindling prices. Some people resented it, of course. There was a progressive movement, so called, that mobilized itself in opposition. William Jennings Bryan was a figurehead of the movement for abundant, cheap, silver money. But on the whole, Americans rather enjoyed a great generation of progress. In the 1920s, prices were stable or dwindled. In the early 1960s, the same.
As recently as 1954, I guess, there were 12 consecutive months of falling prices, as registered by the CPI. And to go back and look at the newspapers you will search in vain for expressions of hysterical concern about that as we would certainly see today. So I think what has changed is not so much the behavior of prices but rather the attitude of our central bankers towards prices. They feel they must control them and they must raise them up.
Forbes: Has there ever been a time in terms of central bank history where a major one has not just manipulated short rates, which is almost a given, but suppressing long rates for such a period of time?
Grant: Well, sure in our own financial history, of course, during the 1940s the Fed was mobilized in service of the Treasury to finance the second World War. And indeed the Fed, not so many years after its founding in 1914, was conscripted into the national service in World War I. In World War II the Fed controlled and pegged, as they said, short, medium and long dated Treasury yields and thereby influenced all bond yields (and they were, as you might expect, rather low). That ended in 1951.
But I think what is different today is the Fed's intrusion into the pricing of stocks. You know, Chairman Bernanke famously, or as you might say, infamously took credit for levitation of the small cap indices a couple of years ago. So the Fed has got its finger in almost every financial market pie. That's a new thing.
Forbes: Before we get to various bubbles or mini-bubbles, the economy itself, as you know in the last five years, 1.8%, truly subpar.
No comments:
Post a Comment