Bulls, Bears, and Beyond: In Depth With James Grant
James Grant is editor of Grant’s Interest Rate Observer, which he founded in 1983. He is the author of nine books, including Money of the Mind, The Trouble with Prosperity, John Adams: Party of One, The Forgotten Depression, and more recently Bagehot: The Life and Times of the Greatest Victorian. In 2015 Grant received the prestigious Gerald Loeb Lifetime Achievement Award for excellence in business journalism. James Grant is an associated scholar of the Mises Institute.
Kevin Duffy is principal of Bearing Asset Management, which he cofounded in 2002. The firm manages the Bearing Core Fund, a contrarian, macro-themed hedge fund with a flexible mandate. He earned a BS in civil engineering from Missouri University of Science and Technology and has a passion for financial history, Austrian economics, and pithy quotes. He also publishes a bimonthly investment letter called the Coffee Can Portfolio. Duffy attended Mises University in 1990 after seeing Lew Rockwell on CNN’s Crossfire in 1989.
Kevin Duffy interviewed James Grant for his newsletter Coffee Can Portfolio. It is reprinted with permission.
KEVIN DUFFY: 2020 has been part dystopian fiction, part tulip mania. How do we reconcile the two?
JAMES GRANT: I’m not sure there’s much distinction. To me, the current form of dystopia is the bubble form, so I think this is the year of the dystopian bubble.
KD: There has been a worship of authorities. For the past thirty-seven years you’ve focused mainly on the Fed, but this year we’ve seen a reverence for medical authorities. Who has done more damage?
JG: The medical authorities remind me of the economic authorities. Both pretend to draw a bead on the future. Let’s compare them both to the meteorological authorities. The National Weather Service spends over a billion dollars a year and takes tens of millions, if not billions, of discrete observations of wind, weather, tide, temperature, what have you. But notice the five- and ten-day forecasts on your trusty iPhone are ever changing. This is the weather. Temperature gradients don’t have feelings, they don’t get jealous of the millionaire next door, they don’t watch CNBC, yet our forecasting ability goes out, maximum, ten days. Even so, the economists think nothing of calling next year’s GDP.
KD: This sounds very much like Friedrich Hayek and the pretense of knowledge. There’s a certain hubris taking place. What might the alternative to top-down planning look like?
JG: Counselor is leading the witness! “Pretense of knowledge” is a three-dollar phrase; in Brooklyn it’s called bluffing. Of course knowledge is dispersed. Every individual knows what he or she wants. An economist would say that we know our own demand curves and supply curves. Governor Cuomo can only guess—as brilliant as the governor is—at what we want and what risks we are prepared to run with our lives.
I am seventy-four years old and every day I get out of bed I am beating the odds. The idea of suspending ordinary living pending the arrival of a vaccine is absurd. Still worse is the forced suspension of the lives of people seventy years younger than I. My grandchildren, for instance. “We can’t sacrifice our children out of our own fear,” said Dr. Scott Atlas in so many wise words.
Life is a matter of tradeoffs. And early on people would plague you if you held this view in public by saying, “You mean to tell me that you are willing to trade off profits for human lives?” Well no, I’m willing to trade off risks, and it’s what we all do, whether we realize it or not, whether we can express this or not. We are all, at least subconsciously, living according to our tolerance for risk. We look both ways or no, we don’t look both ways. We scrupulously observe fifty-five miles an hour or we are young and quick and bold and drive seventy-five miles an hour and probably not run a risk to ourselves or others. So people by and large, not exclusively and not entirely, but people by and large know these things about themselves. And what Hayek was driving at is that the Soviet Union failed for a reason.
KD: Let’s take a step back and talk about some of the early influences on you. When did Jim Grant start to become “Jim Grant”?
JG: July 26, 1946.
KD: [Laughter] When did you realize you were an independent thinker? Was there a lightbulb moment or were you just wired that way?
JG: I’ve always been a “yes, but” guy, a skeptic. At Indiana University, I took a course in the history of economic thought. It gave me a sense of the cycle of ideas—how today’s certitudes become tomorrow’s heresies.
Ideas about markets, individual enterprise, individual freedom—they wax and they wane.
Edmund Burke, in his monumental Reflections on the Revolution in France, described English financial arrangements along about 1790. He pointed out that there was no legal tender law in Britain. The only kind of money a creditor had to accept for a debt was gold or silver. Not even the Bank of England could force its notes on the public. Could anything be better, more equitable? Not for me, but notice that system is extinct.
You could say that economic freedom, broadly defined, peaked around 1914, the year following enactment of the income tax and the signing of the Federal Reserve Act.
KD: And the direct election of senators…
JG: Right. And then came World War I, following which (after the 1920s roared) was the war mobilization of the 1930s and 1940s. High taxes, heavy regulation, economic regimentation. But statism, too, has its cycles. The 1947 founding of the Mont Pèlerin Society, a group of old-style liberal thinkers led by Friedrich Hayek, might represent the bottom of the long twentieth-century bear market in economic liberty.
KD: The roots of our monetary meddling go back further, don’t they—even to the Civil War?
JG: Right. It was to fight that war that the Lincoln administration issued the first greenbacks— paper money not convertible on demand into gold or silver. Salmon P. Chase, Lincoln’s Treasury secretary, pushed the greenback plan while holding his nose. He called the legal tender clause “repugnant,” a form of monetary coercion. Later, as chief justice of the United States, he actually judged that clause to be unconstitutional. Subsequent course held otherwise, of course, and the green notes in your wallet today are “legal tender for all debts public and private.” Hardly anyone gives it a thought. Certainly the precedent for what happened in 1913 was set many decades before during the Civil War.
KD: So 1913 brought us the modern incarnation of our central bank, the Federal Reserve. Its first test, from a monetary policy standpoint, was the depression of 1921, which you wrote about in The Forgotten Depression. What was the policy response back then, and how was it different than today?
JG: The policy response was old-time religion. It was monetary and fiscal orthodoxy. President Warren G. Harding inherited a rip-roaring depression in 1921. The roots of that business cycle downturn lay in the wartime inflation of 1914–18. America entered the war in 1917 and proceeded to do what belligerent countries invariably do—to spend more than they earn and to borrow the difference.
The Harding administration balanced the budget—so no fiscal stimulus. Real interest rates were punitively high—there was no QE. Treasury secretary [Andrew W.] Mellon used his influence to reduce those rates. Meanwhile prices fell and wages fell. The stock market was sawed in half. Corporate profits collapsed. Unemployment was then unmeasured, but it soared. But the price mechanism, more or less freely functioning, did its job. Because wages did fall, businesses could regain profitability at lower levels of prices.
The depression of 1920–21 began in inflation, ended in deflation, but it did end: eighteen months from business cycle top to business cycle bottom.
Compare the Hoover administration’s response to the 1929 stock market crash. President Herbert Hoover (he had been Harding’s secretary of commerce) called on business leaders like Henry Ford not to cut wages. And the
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