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…