Excerpts from James Grants' 

Talk at Google

I Tweeted about James Grant's Google talk here.

The following are some excerpts. 

Material in blue font is Jim's. Material in black font is mine.

In the old days, when a bank needed additional capital, its shareholders would provide it. This was a legal requirement. Nowadays, it's the government that provides it from taxpayer money.

We need to restore individual responsibility on Wall St. Those who benefit from the upside are not bearing any of the costs on the downside. Interpretation: This is testimony to the power of Wall St. Note the array of public officials who have worked on Wall St. before assuming public office.

The only banking institution that didn't receive or require any government bailout during the 2008/2009 Great Financial Crisis was a New York bank named Brown Brothers Hariman. Why? Because they are a partnership where the partners are personally liable for the bank's liabilities. The partners are individually responsible for the risks taken on by the bank.

The 1920/1921 depression self-corrected in 18 months. The 2008/2009 Great Financial Crisis hasn't been set right after 7-8 years of Fed intervention.

The US no longer believes in Adam Smith's invisible hand. Instead it believes in command and control. It's like Poland in the 1950s.  But it's not working!

The Fed employs 700 PhD economists. They are well-intentioned and well-trained, but lack in common sense. Why? Because they missed the subprime mortgage crisis not by 5 miles but by 5,000 miles.

The Swiss national bank creates Swiss francs with the click of a mouse. It then buys shares in American companies. Thus, it gets "something from nothing." How does this make any sense? Money needs to be tied to some kind of material object that has value. Grant is a self-declared gold bug.

Prices, in this case the interest rate (which is the price of credit), need to be "discovered" through the market mechanism, not "administered". The Fed has been doing the latter! Yet the Fed continues to believe that it is better for society that interest rates be administered rather than discovered. This isn't a market economy, but this is the US that we're talking about! 

On US defaulting on its debt. It has already defaulted twice: 1933 and 1975. When inflation exceeds the Treasury bond yield, that's also a form of default.

The present value of US public unfunded liabilities is $120 trillion. Source: Cato Institute, Jeffrey Miron. The US is bound to default in some nuanced form, but it won't necessarily be perceived as outright default.

The US Fed is a monopoly and we all know that monopolies aren't good for society. So why not create competition for it and see what happens? The competition would be to allow, for example, for gold and silver to act as money.

In 1979/1980 when long-term Treasuries were yielding 15%, investors were scared to buy them because previously, they had yielded 9% or less. This meant that bond holders looking backward in time had suffered capital losses due to the fall in bond prices; bond prices fall when yields rise. However, that would have been a great buy because the investor would be locking in a 15% annual yield for 25-30 years. Incredible returns by today's standards.

Today, Treasuries are yielding around 2% and investors still scramble to buy them because since 1980, bond yields have been dropping and so bond holders have experienced capital gains due to a rise in the bond price level; bond prices rise when yields fall.  Interpretation: humans aren't good at detecting turning points in the market. They think that the future will be a continuation of the past. 

Today, there's over $10 trillion worth of government bonds around the globe that have a negative yield. (See the evidence here.) This means that holders of these bonds are paying the issuer for lending it their money! Why is this happening? Because many institutions (insurance companies, pension funds) are mandated to invest in nothing but "safe" securities. There's nothing safe about a negative yielding bond! Central banks are another buyer.

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James Grant gave the above talk in May 2016. In the prior month, he wrote an article that appeared in Time Magazine which I wrote about. See my Tweet and blog post about that article.

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Added on June 7, 2016.

The British author Trevor-Roper has said that the history of thought has not been a straight path from darkness to lightness. Grant seems to be suggesting that monetary policy today may be in the dark and that the US economy in 1920/1921 was in some ways operating better than today.

Description of 1920/1921 Depression

The following description is interesting because it shows how market forces when left unrestricted can lead to self-correcting adjustments that lead to economic recovery and coming out of a depression.

Industrial production fell by 30% between 1920 and 1921 from peak to trough. There was severe unemployment, certainly in the double digits. The stock market was down by half. Commodity prices were down by 40 odd percent. Corporate profits were down by 90%.

The government met this situation with a balanced budget, and with higher not lower interest rates. The latter was perhaps a mistake. 

What proceeded to happen was that markets adjusted.  Prices fell. Wages fell. Because wages fell, profit margins were restored at lower levels of selling prices. So, prices came down. Wages came down too. Equilibrium was restored at lower levels of activity. Because things were cheap, profit seeking individuals sought opportunities. Foreigners sent money to the US for that very purpose.

The gold price was fixed. But the cost of mining it fell. And because the cost of mining it fell, profit margins for the miners increased, and they proceeded to produce more of what in a depression the world needs more, which is money. So automatic forces, or quasi-automatic forces in the marketplace proceeded to do what government actions in this particular long-running cycle -- i.e. 2008 to 2016 -- have so far simply failed to do.

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