James Grant | “Nobody Knows Anything”

James Grant, editor of Grant’s Interest Rate Observer

Recorded: March 24, 2020

[T]his introduces the possibility of everything that gold bugs have been praying for.



Albert Lu: It’s another day of volatility for investors, as hope for a government stimulus package pushes the Dow Jones Industrial Average back above the 20,000 point mark. But how long will [it] last?

Joining me now is the editor of Grant’s Interest Rate Observer and the author of several books, including The Forgotten Depression: 1921: The Crash That Cured Itself.

Jim Grant, welcome. It’s a pleasure to have you on and I promised you just now that I will not require you to answer that question but I’m sure we’ll have plenty of things to talk about. How are you?

James Grant: I’m fine. Thank you, Albert.

AL: Something tells me that the story of 2021 is going to be a little bit different than that of 1921. So, where shall we begin?

JG: How about 2020?

AL: [laughs] Okay. What are your thoughts on what’s going on [over] the past week or so?

JG: Well, it is a light show. I guess the big question is whether Mr. Market has ceded operating control of finance to Uncle Sam in the shape of these quite gob stopping interventions and, in the face of things, it looks as if that were possible. Only September, before the pandemic, the Fed intervened in response to a kind of anomalous, unscripted spike in the so-called repo rate. That’s the rate at which you can borrow against the apparently spotless collateral of the United States Treasury. But on that particular day — was it September 7th maybe? — in early September that rate spiked above 9[%] and got close to 10[%], and that was a cue for, what was then seen as, a rather sizable succession of Fed intervention to tamp down that rate and to facilitate the continued funding of our outsized boom time, then boom time, Treasury deficits.

So what has happened in the past two weeks has been the most outsized and stunning succession of interventions in the history of modern central banking. You know, it’s not unprecedented that central banks do unconventional, even radical things, in the face of extreme turbulence. In 1825, in England, there was a very, very severe depression and financial panic, and the Bank of England did all manner of unconventional things — actually lent against physical merchandise, which was an extreme step — mortified the more orthodox among the directors of the Bank of England.

But in six hearings in 1832, I guess, one of the directors [of] the Bank of England was asked about this. How does he explain what had happened? And this guy, named Jeremiah Harman, a long-serving director, said that, “We lent … by every possible means, and in modes that we never had adopted before … seeing the dreadful state in which the public were, we rendered every assistance in our power.” And he added that, “we were not upon some occasions over nice.”

I love that: over nice. So one could invoke that historical precedent as kind of a calming fact to dampen one’s anxieties about the apparent federal takeover of price discovery. One could — I just have, I guess to a degree — but I myself am not mollified. I think what has leapt out of Pandora’s box of intervention will not be so easily returned there.

AL: Jim, how different is the Bank of England’s approach to lending against physical goods to what, apparently, the Fed is going to do with a mainstream lending program or the relaunched Term Asset-Backed Loan Facility where they’re going to try to get money and credit into the hands of merchants?  Isn’t that essentially the same thing, maybe with some …

JG: Well, no, but it’s never [the same], of course, one cycle to the next. One episode of financial improvisation to the next, it’s never exactly the same thing. I don’t mean to be pedantic; you didn’t mean it was exactly the same thing. Certainly the spirit of innovation is comparable, one cycle two hundred [years] ago compared to this one. You know, another point of comparison is the Bank of England then was, in part, a commercial bank; it was doing its own commercial discounting of trade bills and the like. It was lending and taking deposits.

So the Fed, with these interventions, has become, or is becoming, a kind of commercial bank, right? It’s undertaking direct credit infusion into the economy rather than through intermediaries. It is also acting with unimagined hundreds of billions of dollars to buy more or less everything that’s not nailed down: commercial mortgage-backed securities, residential mortgage-backed securities, [backstopping] commercial paper money market funds, Treasury securities themselves, ETFs, [housing] investment grade bonds. It takes a while to get used to it all, but it is a fact.

And, you know, in my country, in America — I think you are calling from Canadia [sic] right? Aren’t you, Albert?

AL: I’m calling from California.

JG: Okay, that’s a different country too, you know, in some of the ways. But Bernie Sanders is evidently no longer even a low possibility for the Democratic nomination of presidency, but his ideas seem to be winning today, certainly his ideas in finance. Among those ideas of course is so-called Modern Monetary Theory, which is that body [of] thought which holds that the government will do no lasting harm if it monetizes deficits directly — if the central bank prints lots of money — as long as those obligations are not owed except internally, and if there is no inflation at the checkout counter. That’s the basic bare-bones proposition of Modern Monetary Theory which Bernie Sanders endorses and would implement.

But what are we doing if not that? We were doing that really in effect before. The Administration’s program was to borrow and spend, without let or hindrance, with no thought at all to orthodoxy and conventional Republican fiscal practice and mores. The other term for Modern Monetary Theory is functional finance. If it works, that’s great. No remote consequences of these improvised actions. So that program was in progress, in fact if not [in] name, and with the Fed’s actions this week, my goodness, it almost seems as if it were here. All we need is another press release called Modern Monetary Theory, right?

I’m fully aware that the provocation is that of, seemingly, an act of God or at least a viral mutation or something so we ought not to begrudge the Fed its humane impulses. But how do you not mobilize every single possible tool in your kit or bomb in your arsenal next time there’s a downturn in anything? I think this introduces the possibility of everything that gold bugs have been praying for. Are we going to talk about gold? I can’t wait.

AL: But one point though, I wasn’t meaning to imply that it was exactly the same thing … but what is the actual difference in reality and function of the central bank directly purchasing something and, instead, putting it in some kind of special purpose vehicle and buying that instead or buying asset-backed …?

JG: Oh, I think there’s not much difference functionally. I think it’s the Fed conforming to the letter, if not the spirit, of the Federal Reserve Act and to the somewhat restrictive legislation put in place in the aftermath of the last crisis, the Dodd-Frank Act. But as to outcome, I’m not sure there’s much difference.

AL: What about the practice of buying BBB- credits that are, perhaps, soon to become junk and just buying junk? It looks like we’re falling into that trap as well.