James Grant: 'Something Is Going To Go Wrong'

Includes: RINF
by: Epoch Times

By Valentin Schmid

Chief editor of Grant's Interest Rate Observer debunks negative interest rates, banning cash, and helicopter money.

James Grant needs no introduction. The chief editor of Grant's Interest Rate Observer has been an eloquent observer and astute analyst of markets since he started his Barron's column "Current Yield" in the late 1970s.

Grant recently won the Hayek Prize of the Manhattan Institute for his most recent book "The Forgotten Depression," and the Gerald Loeb Lifetime Achievement Award.

Epoch Times spoke to Mr. Grant about the spotty track record of central bankers, deflation, gold and the gold standard, as well as negative interest rates and a ban on cash.

A negative interest rate is not only a tax on saving, but also it is the destruction of saving.

Epoch Times: What about some of the new ideas how to push monetary policy further, like negative interest rates?

James Grant: Negative interest rates are an attempt to tax thrift. The idea of earning dollar bills and putting those dollar bills in a bank and having them accumulate over time, the accumulation of which is compounded over time by the magic of compound interest, that is called saving.

Now there is an alternative to saving which is called investment or speculation. It involves much greater risk. A negative interest rate is not only a tax on saving, but also it is the destruction of saving.

James Grant (Epoch Times)

What negative interest rates do is remove that negative increment, 1 percent, 2 percent, 3 percent a year from one's principal. Not to mention what inflation itself does, if there is inflation. Interest rates are positive, because, in general, people prefer things now rather than later. There's a reward for waiting, a reward paid to the saver for waiting and that's called interest.

Negative interest rates seem to turn that aspect of human psychology on its head and they reward you for wanting something now. It doesn't make sense. So negative interest rates are a conceit of the academic economists who run the monetary institutions of the world. I think the theory is dubious and the practice, as we have seen it so far, is equally doubtful.

Radical monetary policy begets more of the same, that has been the rule. What doesn't work ... there's more of it.

Epoch Times: What about the idea to ban cash?

Mr. Grant: Here's a bet I would make. Not sure even odds, but a reasonable bet would be that within the next year or 18 months, the European Central Bank would call in the 500 Euro note and say that after a certain date, it will no longer be legal tender. We will exchange them up until that date for 50 Euro notes.

I'm a gold guy.

But you hear this persistent beat, drum beat in Bloomberg and the Financial Times and other organs of advanced monetary thinking, which is that we must retire, we must get rid of these large denominations because they compromise central bank control. They facilitate terrorism and terroristic financing because they are the very essence of money laundering; we must get rid of them.

Well, these thoughts are widespread, and what precedes implementation of these ideas is a discussion of them. I think this is coming.

Epoch Times: What would people do?

Mr. Grant: If interest rates were reduced to less than zero and if large denomination bills were retired, what would one do with one's money? This is one reason why the gold market is on a ferocious tear to the upside because people are thinking: "Wait a second. If that's what they want to do to my money, if they want to tax it for it being money, and if they want to restrict my freedom to move things outside the banking system, I'm going to get outside the banking system legally in a time-tested way, and lay some of my wealth apart in gold, which cannot be created through the swift tapping of computer keyboard as can be done with currencies."

I think this is a terrifically bullish moment for gold. I think it's a very sad moment for the institution of fiat money. But fiat money has never worked out well in the very long run. Maybe we're in the very long run.

Epoch Times: People still have the understanding that gold is money?

Mr. Grant: I think there is some atavistic sense to people that gold is something more than a commodity. You'll find gold described as a commodity in the newspapers, but to people, it's not really a commodity.

It's not exactly money. It's not legally money these days, but it is an ancient and legacy form of money. There is some deep-rooted understanding of that. When you see a gold coin, I think most people warm to it. They think it's something warm, precious, and monetary about it.

Bitcoin needs to be explained. You need an instruction manual for Bitcoin, but gold is self-explanatory.

I've heard this explained, and I see there's something there. I see there's something elegant about it this block chain technology. But for the life of me, between Bitcoin and gold ... I'm a gold guy.

Epoch Times: What about silver?

Mr. Grant: I don't pay much attention to it. It was always a subsidiary monetary metal. It has industrial uses; it doesn't have the unique monetary properties of gold. You need a whole lot of it to make a great sum of money. With gold, you need much less of it. Between the two of them, I'm very partial to gold.

Silver will tag along with gold. If this is a new bull market for gold, silver is a monetary metal, it's also an industrial metal and its price at the margin is both moved by industrial demand and by monetary demand, the latter being much smaller I think. Certainly less pure as a monetary play.

Epoch Times: What happened to gold during the last five years, central banks were printing money and it didn't go up? Also, there was talk about market manipulation in the futures market.

Newly redesigned $100 notes are printed at the Bureau of Engraving and Printing in Washington, D.C., on May 20, 2013. (Mark Wilson/Getty Images)

Mr. Grant: Has it only been five years? I thought surely it was 50 years in the wilderness. I think you're being rather gentle on the gold people. I've been bullish on the stuff all the way up, and then all the way down. I should have seen some of this coming. I did not, and I'm not ready to fob it all off on manipulation or intervention. For whatever reason, it got ahead of itself, and the world had not seen a demonstration of the futility or at least of the dubiousness of these monetary experiments.

So it was a bear market and some of us rode these mining shares down nine zero percent, that's 90 percent. That's called not getting it right. I'm not ready to blame the conspirators though I'd like to get them in a room alone and pop them in the nose if there were any.

So what is different now? It seems to me that now, there is a manifest failure of the Ph.D. standard, among other things manifested by the false move in December on the part of the Fed and the utterly unscripted disaster of the financial markets so far in 2016.

They must be telling us something. If what they're telling us is that this is a recession or soon to be, the Fed will have been caught raising its rate at the very worst time, by its own reckoning. People are confronted by the fact that, never mind the possible elimination of large bills, never mind the looming risk of negative nominal interest rates, the world is now faced with the fact that these people, well intended as they are, and well credentialed as they are, know no more about the future than I do, which is not much.

Epoch Times: So it's a crisis of confidence?

Mr. Grant: I think it's becoming one, but I am astounded and have been astounded at the durability of the confidence of the world in these very mortal and fallible people (central bankers).

I find it astonishing. As gold was going down from $1,900 to $1,005, whatever number it bottomed out at, do you really trust the central bankers like that?

The gold price is a reciprocal of the world's faith in these people. And yes the world did. That was not my world, but the world that counted, those with the money making the judgments in the marketplace were willing to vote for, validate, ratify, the institution of the Ph.D. standard, as we call it here at Grant's. From 2011 to just now. How could it happen?! Well, it happened.

I am astounded and have been astounded at the durability of the confidence of the world in these very mortal and fallible people.

With respect to paper gold versus physical gold, if there were sufficient public doubt about the efficacy of these monetary experiments, if there were sufficient doubt as to the validity of the ideas behind these experiments, no amount of paper gold selling would have held the price down. None.

Epoch Times: What about now?

Mr. Grant: People were thinking: "What are they doing?!" They were supposed to be in control. Banks in Europe are on the ropes. Central banks are flailing around for answers, talking almost glibly of the possibility of imposing negative yields.

What more do you want if you're a gold bull than these sad things? So they've happened. I thought they'd happen much sooner than they're happening. That was my error as somebody who makes a living not so much as by preaching what ought to happen as trying to anticipate what will happen.

Gold ingots in an antique safe, about 100 years old, shown at the "History of Money" exhibition at the Hungarian National Bank in Budapest on Nov. 29, 2011, (Attila Kisbenedek/AFP/Getty Images)

Epoch Times: Another thing being pushed lately is helicopter money?

Mr. Grant: Helicopter money is the direct infusion of the central bank's money into the bank accounts of the taxpayers or the voters. Martin Wolf is quite eloquent on this, Martin being the principal economics commentator for the Financial Times of London.

Martin espouses this idea because otherwise, if central banks continue with quantitative easing as practiced by, namely, sending euros or pound sterling, or dollar bills into the reserve accounts of commercial banks, these dollar bills or other currencies wind up merely enhancing the wealthy of the already well-to-do.

If interest rates were reduced to less than zero and if large denomination bills were retired, what would one do with one's money?

They make asset-holding people richer. However, says Martin, as long as we're willing to do that, let us go directly to the source. Let us expand aggregate demand by infusing the wealth of the humbler sort of person simply by sending him money. Once you accept the first premise that QE, as it's now called, is legitimate and effective, then you are hard-pressed to deny that you want to try the second one. So I see this as a coming thing. I wish it were not, but I think this getting back to what the gold market might be sniffing out.

The central bankers are bound and determined to institute some sort of meaningful inflation. Now they say they'll stop at 2 percent, but they can't really measure it, and certainly based on form, they're not going to stop when they ought to stop but they will keep on going. Something is going to go wrong is what I'm saying.

Epoch Times: So the helicopter money will create more inflation?

Mr. Grant: I think that they will get their wish in spades. They will wish they hadn't wished it by the time this is all over. As we began our discussion, the observations make for interesting times. They are great for the journalists, less good for the human beings, but altogether excellent for those that write for a living.

Epoch Times: What if the Fed starts monetizing gold to create inflation or the International Monetary Fund launches a new currency?

Mr. Grant: I guess that is possible. One thing I think we ought to always consider, speaking of possible scenarios is the just muddling through scenario. It's something I've emphasized less than I should have throughout my entire career.

The world gets on mainly. There is no Armageddon. Tomorrow is more likely to be like today than not and radical change happens ever so infrequently. Often not even in one's lifetime. I've spent a very pleasurable 40 minutes or so talking with you about how things could go wrong and blooming disasters and radical discontinuities in the world of money.

I believe what I have said and sketched and fretted about, but one possibility, quite more immediate than the IMF getting control or the Fed crowning all of its enemies with a $10,000 gold price, one alternative is that the world just stumps on through and the Ph.D. standard is shown to be an imposter and yet it continues as well, but with a little less prestige.

So I'm prepared for that as well, but I wouldn't like that. I think that the world deserves a clean break from what has precipitated, I think, a looming crisis. Crises come and go and the world manages somehow to get up in the morning and go to work.