Put simply, Jim is blown away by the ‘caprice’ of total fiscal and monetary spending, which by his math, amounts to an astonishing 29 percent of GDP. (That’s ten times the typical government response in past recessions.) He predicts a tidal wave of future inflation and is puzzled by the complacency of most investors in the face of this threat. Unsurprisingly, he is very bearish on Treasuries and anticipates an eventual return to the not-so-distant past when the long bond yielded north of 12 percent.
LARRY KUDLOW: All right, let’s talk about the market consequences of the titanic scale, and I mean titanic scale, of federal economic stimulus across the board. Think ‘kitchen sink’ says Jim Grant, editor of Grant’s Interest Rate Observer. He is also the author of “Mr. Market Miscalculates: The Bubble Years and Beyond.” A very old and good friend of mine, and a brilliant analyst. Jim Grant, thank you for coming on.
JIM GRANT: It is a pleasure Larry.
KUDLOW: Look, you’ve got some pretty convincing stuff [in Grant’s Observer]. This is the most stimulus we have ever seen. I think what you’re saying is the Fed has poured in 18 percent of GDP. Fiscally, spending and taxing 12 percent of GDP. Those are world records. But this isn’t even the worst downturn.
GRANT:By the numbers, this is a garden-variety recession. So far, statistically, on the GDP numbers, it is ordinary. What is extraordinary of course is Wall Street’s self-inflicted wounds in credit. However, what is truly momentous is the government’s response. Nothing like it. So there have been 11 recessions/depressions since 1929. On average, the sum of the fiscal and the monetary response as we index them is like 2.9 percent of GDP. What is shaping up now, in sight and prospectively, is 29 percent of GDP. Ten times the average response. Now in the Great Depression, before the dawn of Keynesianism, this is three times that response for a recession that is 1/15th the magnitude of the Depression.
KUDLOW: And they may not be done yet! They may not be done yet!
GRANT:They’re probably not done yet.
KUDLOW: First of all, I saw today on one of the news services, my good friend Robert Shiller of Yale, he wants another stimulus package. And I know [Democratic House Speaker] Pelosi’s talked about another stimulus package, other members of the Senate and House...
GRANT: Larry what will they do for an encore?
GRANT: Almost nobody on Wall Street has stopped to take the measure of these extraordinary measures and asked why are they necessary? And could they possibly be not helping, but hindering? So they say you got to do more. Imagine, even on Tax Day, that you have some money, and that you may invest it in a going concern. The sheer caprice of federal intervention, the sheer scale of it, must be frightening money under the bed.
KUDLOW: Well just a quick gander, talking about frightening money under the bed, is this in large measure what this [tea party protest] business is? Is that what this is all about? This tea revolt?
GRANT:I mean I have no idea what they are about. I wrote a couple of checks today and I’m glad to be here with you Larry. Listen, it’s better to have a tax problem than not to have a tax [inaudible]. That goes without saying. It’s better to be born in this country then say, in Senegal. We are grateful to be here. But, enough is enough. And 29 percent prospectively, the sum total of fiscal and monetary response to this recession, is the singular fact of this cycle. And what it might portend for the next cycle bears thinking about.
KUDLOW: So one could ask of Washington, what are you thinking? Let me ask you this. Let’s go to the sum of the market and economic implications of this analysis of yours. First of all, the Fed has just poured money in like there’s no tomorrow. And as you say, when you look at the expansion of the Fed’s balance sheet, that’s coming up to 18 percent of GDP…
GRANT:Larry when you and I were teenagers, we watched the Fed’s balance sheet evolve during the uh, the…
KUDLOW: The Carter seventies…
GRANT:The G. William Miller years…
KUDLOW: Ah right, G. William Miller.
GRANT:December of 2007, the Fed’s assets floated to $870 billion dollars, which is a lot of money even when you say it fast. Not quite a year and a half later it is $2 trillion plus on a downtick. Nothing like it ever seen.
KUDLOW: Is there a monetary boom coming for the economy? I mean even short run? What’s the effect of this in your judgment?
GRANT:Well the effect is to irrigate every single crevice of banking that can bear the water. This elixir called liquidity is all over the joint. Now the transmission mechanism for this elixir is of course a little bit out of commission. The banking system has seen better days. But come the time when the healing is more or less complete, all this money will still be here. The Fed insists it will not be, but the money will still be here…
KUDLOW: There could be a boom out there? Surprise everybody.
GRANT:There could be a huge boom and there could be a nasty inflation.
KUDLOW: Talk to me about the inflation. Now we don’t see it today. We had a consumer price report [decline today]. We don’t see it now. Talk to me about the threat.
GRANT:Well we had a consumer price report that showed inflation was going nowhere. But in view of the deflationary undertow, isn’t it surprising that there wasn’t more deflation? There wasn’t any deflation.
KUDLOW: Ohh. So that’s a tip-off. That’s an early tip-off.
GRANT:So as it is, the world is set up for ‘steady as she goes’. I’m saying that with the sum of these federal interventions, it might be much woollier and wilder than that.
KUDLOW: If I own Treasury bonds what should I do? What should I think about your point of view?
GRANT:I am very, very bearish on Treasury bonds. The upside is slight and the downside is immense. When we were breaking into the business, Treasuries yielded 13 and 14 percent. And you know, people couldn’t have imagined then that Treasury bills would yield nothing and that the long bond would yield…
KUDLOW: You think we’re going back there?
KUDLOW: Eventually. Not a year. Or is it a year? Two? Three?
GRANT:I wasn’t born yesterday. I’m not going to talk about timing!
KUDLOW: [laughter] Okay.
GRANT:But look, the world over, central banks are printing money as they never have before in modern times. Remarkably, in my judgment, people are complacent in the face of this inflationary threat. And they say, look, there’s a huge gap in capacity versus production, you know, our capacity utilization is way below…
KUDLOW: We can make that up pretty fast...
GRANT:Right. We can make that up.
KUDLOW: I mean, that’s happened before. Let me ask you a couple other things. What about the dollar? How does the dollar come out of this story?
GRANT:The dollar is not the worst brand of paper money on the planet. To me all these currencies are approximately the same. They are printed by central banks that owe no particular obligation to the holders of the currency for the stability of those units, for those pieces of paper. The central banks are in the business of demand management and of economic management. They are central planning agencies.
KUDLOW: So would you sell your dollars? Would you buy gold? Is gold the best investment here?
GRANT:No, it’s not necessarily the best investment. It is one monetary asset that can’t be printed and duplicated by governments. That is its charm and its appeal.
KUDLOW: So there’s some scarcity value in that.
GRANT:There’s some scarcity value. The trouble with gold is it yields nothing. There’s no earnings. There’s no conference calls. You can’t value it. It is a speculation like so many others.
KUDLOW: All right, last one. Producers are yelling at me. Is it possible there is a stock market boom in the short run because of all this money?
GRANT:Is it possible? Sure it’s possible. Sure it’s possible.
KUDLOW: I mean, have we seen the early stages of a real stock market boom? Because they’re just pouring all this money in. I mean that’s the deal.
GRANT:Our approach to the stock market is to look for ideas, idea by idea. We have been bearish for about—how many years have I been in business? For 25 years—we have been bearish for 50.
KUDLOW: Mmm, goodness.
GRANT:But we are seeing more things to do on the long side. We are seeing more opportunities in credit, in equities. Things are cheap. Many things are cheap and the government is printing money like there’s no tomorrow. That doesn’t sound so bearish.
KUDLOW: But it’s not going to have a great ending at the end of the day. Thanks to Mr. Jim Grant. That’s Grant’s Interest Rate Observer. You should get a hold of his April 3rd piece. It’s a wonderful article that lays out the dimensions of this ‘kitchen sink’ fiscal and monetary stimulus.
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