The history of interest rates

the History of Interest Rates, the State of Markets, and the Future of Finance

We speak with Jim Grant Jim is a legend of the financial newsletter industry born in the year in which interest rates made their mid-century lows. Jim seemed almost predestined for a life in finance a Navy man standing at 6 foot 5 Jim is a giant on Wall Street. Once the editor of the yield column in Barron's he would leave in 1983 to found grants interest rate Observer two years after the risk-free rate touched just under 20% level that seems nearly impossible to Fathom in today's world of near zero and even negative rates having observed reported and opined on markets for almost 50 years. Jim represents a Bastion of not only experience but wisdom in this episode. We stopped to listen, we stopped to remember a time in which the Extraordinary Measures and unprecedented actions of our monetary and fiscal authorities would have seemed unimaginable. We take a hard look at money. How does the shadow of wealth find its value? How is the rate of interest determined? And what is the role of financial markets and facilitating the discovery of that value what happened in 2008? And what are the consequences? Realized and yet to be discovered of those very extraordinary and unprecedented actions taken by governments around the world to douse the Flames of deflation contain the contraction and prevent the discovery of prices. What does the future hold in 2017? What investments does one make and where might one find Value in these oceans of uncertainty? As always you can gain access to reading lists put together by me ahead of every episode by visiting the show's website at Hidden forces pod.com lastly if you are listening to the show on iTunes or Android make sure to subscribe if you like the show write us a review and if you want sneak peek into how the sausage is made or for special storylines told through pictures and questions, then like us on Facebook and follow us on Twitter and Instagram at Hidden. Forces pod and now let's get right to this week's conversation. So Jim Grant, I'm very excited to have you in my studio for the first time in four in four and a half years. It turns out it's been that long. Yes. It has not this to do a different studio. And in fact, you may not remember the title. So it was four and a half years ago that you were on my television show capital account. You may not remember or perhaps you do the title of that episode. Refresh my memory for me Honey. I Shrunk The Yield curve. And so that episode was about a question that I had posed to you that and to the audience as well, which was one of not so much was the FED culprit in the low rate environment that we had and continue to have but was it the question was was the fed the culprit prior to the crisis. In other words was that the accommodative monetary policy prior to 2008 that led to the boom which Of which the subsequent bust has created such perversely low rates or is the Fed today that is keeping the rates low and that's something that I will want to get into in this discussion. But I think I don't want to take our audience's knowledge for granted and I want to nor mine either. No, I'm not taking it for granted. But the very first question I have for you is, you know, let's do a top level here which is interest rate. So you are the publisher of Grants interest rate Observer. You're also the Podcast host. I should mention of sure which is pretty but we also as you know doing we all have a podcast you have to have it's the latest thing now, but you you're dating me because I called my publication grants interest rate Observer. That was when we had interest rates and I got to tell you there are fabulous. This was 1983 and within a year the founding of Grants you could and some did invest for 30 years in US Treasury Securities and earn almost 14% point for 25 of those 30 years guaranteed think about hmm, and now and now Dimitri so different are the times in which we live that some people some sentient human beings with money or lending those mostly euros and some yen to Sovereign governments deemed solvent through courtesy. They're letting these government's money and paying the government's for the privilege of taking their money for two or three or four years extraordinary ways. Not you pay them. Now you're talking about a negative interest rates. So let's talk about that. Let's first of all, let's define that you were the editor of the yields column at Barons, correct? And you started grants interest rate Observer when interest rates still existed. These are things now that their children born today that have never seen an interest rate never seen an interest rate. So what is an interest rate for those children and for those coming of age or even those who may have forgotten because it's been a long time since we saw one.

What is an interest rate interest rate is the cost of of borrowing or other pay for Lending or as you've said before the price of money, press money is snow. When we looking at it interest rates. They are prices first and foremost and they are arguably the most important prices in capitals. And certainly there are the most useful they for example either help to Define risk, you know, if someone pays a great deal to borrow that person you can kind of assume is not such a That is a solid character financially. So interest rates help Define risk. They also help to set investment hurdle rates, meaning that you know, you feel you ought to earn something in excess of what we might call the risk-free rate for taking the chance of building a plant and Manufacturing something in it. So interest rates help you define the level of profitability you want you think you deserve for the Risks you take in work you do to produce something and then to interest rates help you to understand the present value of future sums of money. Mmm. That's called discount rate. How much is a dollar that you will receive in the year 2027 worth today given the expectations you might have for inflation. For example, another way of looking at rates is that they are the rewards word for Thrift for waiting. We are impetuous we human beings for like to have what we want to have now and if you choose to forgo that immediate pleasure and and wait the rate of interest might be seen as the reward for your lack of impetuosity. That's another way of looking at kind of a moralistic way of looking at it and it's funny that in this day and age of Amazon Prime and everything available at an instant that interest rates are historically low in Act Dimitri. I'm going to tell you an astonishing fact, when was that? I'm very impressed. You want to hear it or not? And you want to hear it. We live in a time of 5,000 year firsts in the history of Interest daily interest has been long established phenomenon, and there is a page Turner called the history of interest rates Homer and Dick. Sola Sheila and is the still-living co-author and I called up there and I said dick tell me we have today negative interest. Straits in Europe and Japan and You are an authority written this book with Sidney Homer and I have read many pages. Although I confess not every single page tell me have we ever before in the recorded history of interest rates seen a negative substantially negative long-term interest rate, and he said no never never in the history of interest rate is interesting though. Well, it speaks to the experiences. Yeah. It was its you re yes, it speaks to something much. Oh well. It's interesting what you say, you said many interesting things you identified many factors that go into the pricing of interest rates one of which I find interesting and compelling which is this notion of deferring towards the future the proceeds of today's output the use of interest rates the existence of interest rates motivates people to work more today than they would otherwise because they can reap the rewards of that work in the future. And so there is that component to interest rates. Well, there's a big time element isn't there. Them take today's little tiny midget interest rates. You can scarcely see them. you have to need you need very strong spectacles to make out today's interest rates. So what do they do rarely do they do two things? Perhaps one. Is that the bring consumption forward in time you can or you could before lenders wised up get a very cheap car loan and buy that ride you wanted today rather than wait a couple years because the the terms and conditions were so compellingly favorable. so interest rates to a degree stimulate, but they stimulate arguably not by creating something new but by borrowing from the future And something else that very low interest rates do as little subtler and that is that they postpone the recognition of failure in business. If you are kind of a marginal business and you are not quite making it but almost making it and you go to your bank and because it reaches alone because capital is so accessible you borrow and prolong the life of an Enterprise that otherwise would have gone out of business. I think Radio Shack for example using the onion some years ago that 2007 had a very funny pieces of fake interview with the then CEO of RadioShack and and the imaginary interview or talk to the real though imagined in his presence CEO of RadioShack and say how do you stay in business? And the guy said CEO yeah, the said that you know, I have no idea. We had actually sell enough extension cords and strobe lights the stain. I have no idea how we do I wouldn't be sitting behind the desk.

In effect if I couldn't borrow the money to sustain the corporate life. So Radio Shack live longer than it might have lived in a time of higher rates a friend of mine lichens meaty substantial interest rates to kind of a shot clock in basketball, you know way back when in the early 50s there was no shot clock in the early NBA would stage games that ended in like 15 to 12 like an adult came game of keep-away people could pass the ball back and forth and the audience would either fall asleep relieved at halftime and TV ratings plummeted. So they put in a shock-like force to Force action and substantially real meaning above the rate of inflation interest rates by imposing a cost on borrowing us real cost on borrowing by attaching a real value to money. I say Force economic action. So in that sense the very very low rates may not at all be stimulating but rather depressing. Well, we're going to talk about that because you actually had a mentioned this before but there's an article that I came across ahead of this interview from in the National Review where you talked about this this sort of paradox, and I think it's relevant to our discussion, especially in the context of this question that I want to get to which is we're talking about what interest rates are interest rates are the price of money the cost of credit. They prior to the Federal Reserve they existed and they existed long since as you mentioned with Homer and Sola they've existed for centuries. It's not something that is that depends on a central bank to exist. So I guess let me ask you this question and little this will bring us to the question of what is the fed. And what is the role of Central Banking how our interest rates set prior to central banks? Well, David Ricardo the great early 19th century Economist had a theory that the interest rates really existed that as you said to me she had independently of Central Bank action rates said Ricardo were a reflection of the profitability of Enterprise and the more profitable business was the higher the rate of interest that willing borrowers would pay because it paid to borrow. And notice that said Ricardo that that rate of interest established in the market as a reflection of the profitability of capital had nothing to do with the rate that a central bank charged on an overnight loan or a week-long or 90 day long. This was an economic fact independent pure monetary considerations. The price of Grey was a prize like evident like anything else and it was something that Banks could extend and the extension of credit was the process by which was part of the process through which the Ice of credit was determine, which is the interest rate, right? Correct all correct? And so now in this world of Central Banking since 1913 until 2008, although it's gone through iterations. There was a sort of a way in which interest rates were set and that has traditionally been open market operations, which is the Federal Reserve. Correct me if I'm wrong there will no again to borrow from the eminent late David Ricardo rates were really never said he I think I tend to agree never exactly said except in a very isolated part of the money market by central banks there were set by human beings transacting deciding. What was the Fair rate what the market will bear? Now the FED came into existence as you say in 1913. So United States was around a long time before the coming of our Central Bank and rates. Then we're set is the price of Apple's was set to a degree where they set right away when the Fed was came into operation 1914. Did they immediately know open market operations came soon after the Fed was found if not immediately that if I remember crying I was just a trainee at the time Dimitri, but Remember correctly open market operations came into being because the FED needed to make money to turn on the lights and pay the helm there were a way of earning money for the central bank, which is then rather more independent the government that has since become. Well, it was a question. I mean, the rationale behind the the setting of interest rates is something that has always perplexed me. It's something that I've investigated in at least one interview with former vice president of the Federal Reserve, and he was not able to give me a clear answer. as to why the FED needs to set interest rates, but in order to move to this point, which has to do with the mechanics of interest rate setting sort of the traditional way that we know that the FED sets the FED funds rate, which is the risk-free rates the the rate at which basically Banks can lend overnight or borrow overnight is through something known as open market operations, which is the Fed basically coming in and out of the market as need be in order to adjust the supply of money accordingly in order to make sure that rates Right within a certain level that they deemed to be ideal or whatever it is that they've set is that fair? Yes, that is that is entirely correct. Of course, there's been an evolution in that there's been forward guidance and all these other tools these these fed these federals are tools that they they've developed but certainly since 2008 that the entire model is gone out the window. The entire fed funds Market has changed banks have you've talked about this at Grant's the amount of excess reserves on bank balance sheet says Even more sort of astounding to see than just the expansion of the fed's balance sheet the excess reserves. I think I've gone from roughly 1 billion to 2.2 trillion or something like that. So my question really is how do we think of interest rates today? And when I say again interest rates, I do mean the FED funds rate which is sort of the the the risk-free rate the foundational rate in the market. Well, I think the way to think about race today, perhaps is to compare them with rates as they existed in the the money market before the Advent of the fed and hundred and five years ago or so before the FED came to existence people would would trade money market balances on the New York Stock Exchange as they traded Common Stocks and there was a post New York Stock Exchange the money posted which people would buy and sell short term balances and that rate was very volatile it varied according. to the season varied according to the business cycle the business cycle and it was more or less a free market rate. That was then. So today the Federal Reserve is in the business of establishing short term money market interest rates to advance some national interest as the FED itself defines that interest fed is in the business to promote full employment. It's in the business to establish price stability so called The business to promote prosperity and it thinks it can do that by the manipulation of one or more rates of Interest. That's it's essential remit. And I think think thoughtful people are going to wonder why if interest rates are price is why they should be controlled where we don't control other prices and we have in fact in modern American history attempted to control all prices. We did. So in 1971 and 1972 under the Nixon Administration Nixon imposed wage price controls, very radical step that think is pretty universally now regarded as a as a pratfall as a failure. So the question hangs in the air Dimitri is why people persist in assuming without examining this assumption that as a good thing to control interest rates and not sure it is I think that we want is kind of free-range farm-to-table organic interest rates, not the Hothouse Supermarket variety of government manipulated ones. So when I'm president United States and our chairman of the fed or chairman of the FED, whichever comes first, I will agitate for Organic interest rates will call them just to get the green people on board to I know this is again what you're best at Jim and I think what people love to hear from you is to sort of sermonize I think in a way on interest rates, but you also had grants cover a lot of the minutiae of the the way the system is today and one of the things that's in the news that is now sort of it's been talked about for a long time has been this notion of unwinding this balance sheet. Now one of the ways I think about the FED balance sheet. Is that it Presents it's a visual representation of the financial crisis on that balance sheet. You can see the actions of the FED took in 2008. You can see sort of the failures of the financial system. We've been carrying those facets on that balance sheet since 2008 well to back up a step or two a balance sheet is a representation of what an entity owns and what it owes. So the FED is a bank that's its genus species is it's a bank the central bank and its balance sheet shows assets and liabilities conventionally the assets. comprised mostly treasury obligations emissions of debt emissions the federal government notes bonds the mortgages the like Liabilities what it owes well as a dollar bills Federal Reserve notes and deposits of banks at the FED. Those are what the FED owes others. Now when you think about a Federal Reserve Note is that liability? What's that? What is it? You wonder what whose liability is its piece of paper? What talking about dollars basically? Yeah. So this is a little bit of a historical Echo. Reserve note a note is a promise to pay a debt obligation. Right? So it comes from the Federal Reserve donor comes from banknotes of yesteryear a banknote was a claim on something tangible named Leon money itself a note was a promise to pay money. What was money well money was gold and silver. So this is the so Federal Reserve Note today is the expression of the historical evolution of money from something that was grounded in a tangible thing was itself a tangible thing money was gold and to today where money is increasingly dematerialized what you know, a Bitcoin of the private sectors own invention is something you can't see touch haft smell it. It's in the cloud or whatever such things exist. It's a digital expression of somebody's idea of wealth and scarcity. It's a very interesting proposition the nature of money, but the fed's balance sheet is just as you say very well as a pictorial representation of the crisis its growth certainly is a representation of the crisis. The nature of the materials is an expression of what we all accept to be money and debt interchangeably. So in today's World, yes.

Yeah. Well in times past the money and debt, very separate things money was I say was people say that gold-backed the dollar no gold didn't back. The dollar gold was the dollar was silver was the dollar a given number of of ounces or of of units of precious metal was in fact money itself and you know that of course it's changed over the past hundred years gradually in by degree until demonetised. Everything except really except for the power of the state. So I'm I mean, this is a great philosophical conversation and it's something that I think people ought to reflect on but I'm very curious about this question of the unwinding of the balance sheet and I bring it up why because we've been told that we shouldn't be concerned about the actions of the FED took if you look at the Federal Reserve balance sheet since basically from the founding of the FED to today to 2008 those balances have grown. But they've grown gradually with the rate of inflation and with the growth in the economy. We never saw anything like 2008 and we've been told that it's yeah sure. It's not something that they've had to deal with before but it's not rocket science. We shouldn't worry about the you know normalization of of the balance sheet. You guys have done some work at Grant's looking at this thinking about sort of how the FED is going to go about doing it. We've heard things like caps. We know that the FED pays interest on excess reserves that goes into this whole bundle but What is your view have you think at all about how the FED is going to manage this? If course some years ago in 2009, maybe you're in the early days of what we call quantitative easing that being a fancy phrase for a really materializing dollar bills or the digital expression of dollar bills out of thin air fed. Does this and way we can talk about if you like, but at the start of this program this unprecedented program of Natori materialization prestidigitation magic making the start of this Ben Bernanke than the FED chairman got on 60 Minutes and The correspondent asked him. Can you reverse this? Can you stop this? It's like The Sorcerer's Apprentice you sure that this this can be stopped me. So certainly we can do this in Reverse this all in 15 minutes Well turns out that they really can't reverse this in 15 minutes. It's been my time does fly a see 2007 was the start of our troubles and this is 2017. That's 10 years of temporary. Emergency stimulus that's balance sheet now stands at four point two trillion in the day before the crisis struck for recognized rather the crisis. It was what eight hundred billion or so, I think it's even for five, isn't it? I think it's even more than that. Well, it's a few extra well-rounded Phil. You to keep up Dimitri 4.2. I think you'll find is it? Well, you would know better than I you certainly wouldn't know somebody's going check and I have my face will be ready within there. What do you say we come from? I would call 4.35 what really is that between friends. Nothing that problem. Somebody wrote something The Wall Street Journal, I guess while I go reminding us. We should not bad around the term trillion. So glibly a trillion being a thousand billion which to borrow from Jake LaMotta. The middleweight champion is a lot of money, even you say it fast. But so the so so the FED is so the FED buys these bonds has been been buying them or did buy them over the years and quantitative easing as a program was called. It has FED buy bonds. That's the place to begin. Well it buys them by creating the means with which to do it. If you and I want to go out and buy Jose around I said million dollars worth of treasury notes that will pay us interest and to a sustain us in our in our mellow golden years. We have to get the money so we have to borrow it or have saved it or steal it or something. We have to couple the money ourselves. Now the FED being Central Bank is not so constraint. It creates the money literally through The tapping of a key on a computer keypad. It credits the account of the seller of the bond. It says all right, we'll take the bond and here is the payment we credit your account at our bank with 1 million dollars tick tick tick tick I guess has and that's the end of the transaction. That's so that's that's how the FED makes money. We should all be so talented that does that make him who his broker dealers? Yes through a so-called primary dealer IDs, Has right? So the been doing that lolis many years long as many temporary years and it is accumulated from a standing start of what we say 800 billion or so a balance sheet. Well in excess of four trillion dollars meaning it owns assets to the tune of more than four trillion dollars SSO. What do we do now? Well it ought to it thinks before we leave this sum of money to maybe we should might reflect on the capital that is supporting these.Massive assets, right if you personally seek to go out and start a bank and the choir a lot of loans you need what they call a cushion you need something to absorb loss in case you miscalculate and you typically these days they insist do The Regulators that you have at least 10 or 12 better still 15 dollars of capital for every hundred dollars worth of assets that's considered. Presentable. Well, the fed the FED being immune exempt from many of these regulations of the proletarians are subject to goes out and buys Securities without regard mean it's scarcely owns any countless tiny sliver of cabin. fact part of its capital went to finance the latest Highway Bill, maybe your to ago. talking about the remits the treasury. Yes. Well, it remits its earnings to the treasury, but it contributed to the Treasury under the act of Congress that contribute a portion of its capital to finance Highway construction. So the FED is a bank that presents the ugliest thing in finance and seducers. I mean said the fed's balance sheet is a fright. It's the ultimate zombie Bank. Yeah. Well it if it were a bank in competition in the real Market Place, it would not be allowed to exist. That's who would be Death Star Yeah, well, yeah, maybe there's a death started working. Well said so how does it shrink? Well, it shrinks it would shrink if it wanted to shrink by selling these bonds that accumulate more or a little less you take its time and just just let the mature and then it gets the money and it remits that money to the treasury but notice when it does the treasury must still borrow and 70 must buy the bonds the treasury issue because the treasury we call the Department of Treasury to meet you, but actually we should call it the department of the debt because there's no treasure. In the treasury not enough. So the treasury's continue to borrow and who is going to buy these bonds. If not the fed. That's the question. That's a great question that actually brings us to and I don't mean to interrupt you. It brings us to a very important question, which is exactly that if the FED were to leave if the FED were not to go away to stop which is what you're getting at. What would happen to the bond market the bond market would continue the bond market existed to antedated the FED certainly that will Follow the FED when fed makes its long-awaited and well-deserved exit from this planet bonds will find buyers but not necessarily at prevailing very high prices. It's like everything else see you the dress business and this this metaphor is going to get quickly strained, but you are making very very fancy dresses and and you wonder what's going to happen to the Dress Market when you stop supporting the price of these garments through very very, Imaginative and persuasive advertising what was going happen what's going to happen to this overhead supply of frocks is the price of a frog is going to fall right? So there's too many dresses in proportion to the evident demand. Well, the the excess isn't going to get burnt or it's not going to vanish it will get sold but not at the hope for prevailing price of yesteryears going to get sold at lower price. Ice so only with bonds I think the so interest rate meaning the inverse relationship between the price of a bond and it's yield right? So if a price of a Bond Falls, that means that the interest you earn the buyer the saver goes up right on newly issued debt, right and because you can make a deal with already existing debt to equalize interest rates across new and aged Securities. All rates will go up If the Fed exits and ceases Thing what do you think of the proposition that absent a Federal Reserve an economic crisis and contraction would be so extensive that even a government with a highly indebted government running annual deficits would be considered a safe haven Treasures would be considered a safe haven and therefore yields would actually go down. The price of bonds would go up where the FED to just literally let's say just blow up tomorrow. Well, we can't know and we can't or shouldn't Dogma ties about hypothetical propositions like this, but we certainly should think about them. It seems to me that if the FED were out of business and if there were a crisis that people would as they have in the past regard the treasury as a relatively safe port in a storm. Perhaps the safest Port among many ports in a storm. the United Treasury is it's evidently indestructible try as we might the credit of the United States is is a very well founded not necessarily on the on account of the Prudence or the foresight of the managers of a given political administration because of the nature of this country is a great country.It's an enterprising country. It's a rich country and many assets to sell yet many taxes to level yet. Hmm, you know that I am a for ever habitual and perhaps somewhat repetitive critic of our monetary arrangements and of our fiscal Arrangements, but there's no gainsaying the success of the treasury of the dollar bill itself dollar as the world's great currency. It's the you know, the Coca-Cola of monetary Brands as we said before it's a pretty great brand try as we might database at the world still wants more I think about it in the context of Japan. I mean, that's the one, you know before this interview. I was trying to think about it. And look and see and draw comparisons between the United States post 2008 and the Japanese post a 1989 and I was also of course ticking looking forward China perhaps some other countries around the world that might be in that position but no no country seems to be in a position similar to China. And so when I was thinking about thank goodness, by the way, it's pretty terrifying actually you seem to have used on China. I heard a wise man say once That the further one is from China the more authoritative he or she yes. Well, no expertise is is reversely proportional to the distance of the authority to the subject being scrutinized that goes without saying Dimitri, but we can read income statements and balance sheets. Even those produced in the Far Far East. So China's that is twice as big as its output and it's growing twice as fast and never-before-seen have been the financial Shenanigans through going on in the Republic of China that's a fact and that is not a fact based on you know, fake expertise. Those are simple arithmetic tells a little bit about those facts for those for those in the audience who aren't familiar with China is what do they say? It's a thing it is the it is the greatest width of the borders of China is the greatest derangement of debt ever and that incorporates the Tess's of Japan in the 1980s incorporates our own flights of fiscal fancy here and mean, there's nothing like what is going on. Japan never has been and Chase are in China. Japan was another one. What do I mean, I mean that the recklessness of the lending and borrowing the deceit and the lack of transparency of those debts. The sheer rapacity of the speculation of the promoters of speculation is historical first. Well, the Chinese unlike the United States and unlike any other country. I've looked at even countries like us. Or Canada had a hiccup in credit creation and credit growth after 2008 in China. It went parabolic so their response to the crisis because they have such a strong control their banking system was to generate more credit extend credit and push economic growth forward. Yes to the Chinese team seemed bound and determined to fly in the face of every single received tenant of prudence and safe dealing in banking and lending and borrowing. Owing banking being a subset of lending and borrowing of course, for example, it has been an ancient principle of banking that real estate is a very poor asset why because it is illiquid. It's To realize they say it's hard to sell in a pinch American banking regulations prohibited Banks from accepting real estate collateral starting in the 1860s. When those regulations were first written Unwritten regulations and usages in Britain, which got a head start in modern Finance also frowned upon real estate and mortgages as suitable banking assets and America has has loosened those structures so has Britain and often We've done this to our to our pain and to our loss in China the heresy of real estate as a banking asset is not a heresy. It is it's considered best practice. There's a bias towards a not even just the bias. What you're saying you look real estate is the as the collateral par excellence in China of debt and people have come to accept the very dubious proposition that that real estate no matter what it Yield, no matter how it might be priced is fail-proof conservator of long-term wealth. That is the belief that is infused the Chinese people. So empty blocks of Apartments rise up into the air and and and the collateral is thought to be fine and and liquid and it's not it's not fine. It's not liquid and it is going to have a very bad end when you look around the world is China sort of top on your list for a possible source of the next Crisis. I understand very much. mean it's very much in the in the line of Grants and the way you write in the way you think to be very prudent and to not make prognostications.I understand without question. Well, that's not so much previous assault itself experiences self-knowledge. Well, no, let me say by way of preface and consumer product warning. That we do tend to be early and got bearish on the excesses in Japan. I think starting in we coined the phrase and upon all Mania and I think it was not at the top I think was many years before then. So yes, we do expect a very noisy and scary and costly day Numan China when I do have no idea. And of course China is a very different situation than Japan in so far as the Japanese Market was more Market oriented than the Chinese market and so far as the Chinese banking sector. I mean, well China seems to have Consolidated or seems to have combined the worst facets of regulated capitalism and communist micromanagement. So in light of this discussion around potential sort of pitfalls, we were talking a little bit about the balance sheet the unwinding of the balance sheet. There are many pitfalls there. There are pitfalls, of course in China it with the debt one of the The asset classes that grants talks about often is gold and something that you've spoken about often. We spoke about it now in terms of sort of in the philosophical sense of its role as money. And what do you say in your newsletter? And how do you think about Gold's role as an investment and as a speculation and what are you really speculating against when you own gold because I know you're bullish on it and you've been bullish on it for some time. Well gold is a very poor investment in the nature of it. It is money. It yields nothing at stake. Terrell it looks good. We all know people like that doesn't say much looks good gold is the guy said this perhaps do you personally to meet you? Certainly, I've said it before gold as the price of gold. I see as the reciprocal of the world's faith in Central Banking. It's the opposite where it's the other side of the coin of trust I once was in a small company Paul volcker who proceeded to reflect on the Curious faith that people vest in a piece of paper of stamped full faith and credit notes payable satisfaction of debts public and private whatever it says in the fine print of a dollar bill people. Don't read that much more than they read the directions and come with an aspirin bottle, but people except without a great deal of thought or analysis. That these pieces of paper this dematerialized entry in your bank account. That is somehow it it has an innate value of y is that where's that value come from is come from the stamp of the government. We if the trouble Administration stamps a piece of paper a valuable tool is ever going to accept that as it is that self-evidently valuable. Well, the world collectively has come to I think of remarkable degree to accept that very proposition whether you're in France whether you are in Japan weather You're in in Brazil people accept the value that is said to be present in government-issued pieces of paper called currency. So a gold competes against that gold being the Legacy form of money being form of money that activated all these pieces paper that has shown itself gold has shown an ability over the years the decades the centuries even the Millennia to hold purchasing. Our gold competes in the marketplace of ideas and of monetary preference against these pieces of paper also now competes against cryptocurrencies things like Bitcoin and gold has been is given a very very mixed account of itself since the year 2011 it peaked at I forget now just under 2,000. Sorry just hundred mm. Right? Mm. Mm. Mm dollars an ounce and yeah that's twelve hundred and sixty or something. The dollar bill has lost about 99.99 percent of its value against gold since the start of the FED in the year 1913 or effect of 1914 gold has stood up well against any currency but people want performance in the here and now and they want things that appreciate in value and gold has not given them that satisfaction. I own it. I own the metal itself. I own the mining shares and and my strategy Dimitri is not to look at it now because I think successfully finally persuaded myself that this is something for I'm investing in what I take to be what I believe to be an almost an inevitable historical outcome. That's a very big fancy statement to make but I'm investing not speculating. I'm investing in the disappointment that ending every single experiment in paper money down Through the Ages and I'm investing in my expectation of the failure of the most radical experiment and paper money. Ever seen almost imagined in other way to say it is besides the idea that you're shorting central banks essentially, but you're bullish on gold insofar as your bearish on paper currency, right? I am bullish on gold because it is a play against what is going on the central banks of the world.And of course that is not absent the policies of the central banks. In other words. It's very much about the policy essentially what I'm also making another but I'm betting while the way that this word bet in. Noise me because I wrote in one of my books about speculating Bernard M Baruch that group describes time. He was in the presence of the August JP Morgan and they were discussing Morgan and Brooke were discussing a proposed Venture Capital deal. Veruca speaking rather glibly in the presence of this giant of Wall Street said that he would that Morgan would contribute this and he broke would bet and Morgan stiffened and said I never bet in the interview was over so bad I said bed shouldn't have said it to me tree, but I just said and I'll stay I guess I'll stand by. So what I'm betting on also apart from the failure of these I think Takamine Central Bank policies on betting On other people besides myself and two or three good friends and my grown children espousing the same idea and acting on it and that a very different thing. I'm betting that people who are so used to dematerialize money. They have no idea what gold is I'm not blaming you Dimitri, but I notice that you have that annoying Millennial look about you of Youth and health and and I'm dead in that people who were not around when gold was last treated as my that was all. 14th Missed 1971 those people to will come to see in this ancient monetary element a store a value that is not on offer from the governments of the world. I mean, is it a fair assumption for me to make that in order for that to happen there needs to be a currency crisis there needs to be a current. Yes. There does need to be a currency crisis and I think there also needs to be a demonstrated failure of the attempt by central banks to manipulate stock markets. And bond markets and real estate markets and I say manipulate with very with you to help you use the word precisely the central banks, especially the FED have been manipulating expectations of higher asset prices. They have used these expectations to levitate asset values to support the expansion and economic activity that we have been struggling to achieve low these almost 10 years. So this was the program of the Bernanke fed to get the stock market going get real estate markets going get people investing and watching their assets appreciate and thereby inspired and emboldened if you go out and spend money the wealth effect. Yeah. These are called trickle-down now we call the wealth effect. But in fact there can be a perverse instantiation of that you've talked about it. I alluded to it earlier. I believe one example, simply put is that low interest rates and high levels of debt private debt are actually can drive many sane people to want to save more and spend less. Yes, and they can and too much debt can throttle business activity. You can suffocate it just the burden of servicing debt looking in the case of the United States government interest rates. The treasury is paying what 2% or less average for its borrowing. down from nine or ten eons ago it seems but if interest rates return to the long term average in this country called 6% The treasure will be paying interest on its substantial, you know, immense debts that would rival the now the budget of the Department Defense Department. Can you imagine that happening though within the context of having a Federal Reserve that is separate from the treasury or what do we need to see some kind of radical political shift where the Federal Reserve is sort of in general? Tested by the treasury comes under the treasury. I have lived long enough to rule out nothing and markets the idea of a 6 percent interest rate on 10-year treasury now seems impossible doesn't it seems it seems as if it were outside the realm of literally of possibility, but it existed looking at in the past 15 years. I really need this for sure. There was a 14% treasury yield as recently as the spring of 1984. and ten percent Revealed as recently as the summer of 1987. This is not ancient history. But you know, that would be catastrophic for the government. Well, it would be inexpedient would be catastrophic and just because it's an experience. mean, it can't happen people say well I can't I can't happen. Well, it would be better if it didn't happen. But how many things happen despite there being so high so cute. So how might that happen? I'm ready to go. I want to I want to know what is Jim Grant think it does Jim Grant have some. scenario or two that he considers to be that he's imagined in you know thought about the thought that maybe this without quantifying it is more probable than some other scenario.

Is there something let me tell you a short story about how interest rates have in the past tended to move in time. Unlike any other asset Market. I know interest rates Trend or have tended to Trend over the course of generation. They fell for the 35 or so years following the Civil War in this country. They Rose from 1900 1920. They fell to 1946. That was a quarter Century. They Rose slowly at first then fast then seemingly as if they were would never ever stop Rising they Rose from 1946 1981. I was 35 years and they have fallen and laterally have gone sideways in the 36 or 38 was ever spent since 1981. What has characterized the movement of rates in the past has been a very gradual shift as the direction has kind of almost in a geological times. We now it seemed is that plates have shifted rates have moved up slowly or down slowly? They tend not to not to spike at least the beginning it took in this long long trending 35-year Beer Market in bonds. Meaning bond prices went down. Meeting interest rates went up it took interest rates 10 years to move from Two and a half percent to three and a half percent ten years not to say it's going to go the same way this time. But so when I say that six percent is is not impossible. It's unlikely that a sudden of a sudden but you know, we live in a world of Wonders and who knows people have forgotten all about inflation government's the world over a sink nothing of running big deficits and putting lots of money. Maybe maybe they'll be an unscripted inflation that will cause rates to move more suddenly than we have been accustomed imagining they could move but one way or the other what you're essentially suggesting is that rates will continue to move and budget deficits will continue to grow and they will be enabled through the central banks. And so ultimately it will be not it will this will not be a crisis of budget of nominal budget deficits declining and government cutting back nominal spending, but that in fact there will be inflation I don't know that I mean, I wish you would talk to me dude you about that 35 years ago. I knew everything was going to happen next week. Well, you have a great story that you know, I love seeing stuff that you say Jim or watching videos of yours. You have that great story of you in 1981, or was 1982 it when a you waited on line to buy a few ounces of gold and the lesson you learned. I love this. You said I learned a lesson which one I'm paraphrasing you here, which is never wait in line to buy anything. Oh, yes. Everyone must know this. I'm happy, too. Serve as the index case of waiting in line that might have been this is perhaps a little bit too evidence of personal conceit, like to think that I made the top in the gold market in 1980 was January 1980 that the gold price peaked about eight hundred and fifty dollars an ounce and went parabolic even as Bitcoin has recently gone parabolic. It was like $400 an ounce in the fall of 80 79 and almost doubled in the succeeding three or four months extraordinary run. Then people began to impute causation to this. They've been into interpreted well gold market must know something. It must mean something it must mean for example that the currencies that currencies are soon to be entirely worthless gold wouldn't be going up except for a well-considered belief that Martin markets know things, right? They they discount the future. So, okay, so people to buy gold. And it became a must do and they were queues outside the Nicholas deakins DEA key DEA, K as a coin dealer in lower Manhattan and I jump fashion stood in that line not thinking that the thing to do was to stand in no line in to buy bonds, which are that's the spring 1980 they pass 10% in yield. So they were not quite at 10:00, but they were at 9:00, so you Of locked in nine percent, by the way, 9 percent Bond was 30 years. Yeah, wow would have would have seemed very poor bargain Because by the time September 1981 rolled around that same Bond was trading well in the 70s or anywhere that the yields were 15% Not nine percent. So there are any number of possible ways to make a fool of oneself in market, but the best way the best way is to do what everyone else does and the most certain way of knowing that you are where you're not supposed to be is finding yourself physically in a queue to buy a high asset and Dimitri. I did it. Well, okay Jim. So before we wrap up I wanted to also ask you, you know, besides gold, which is something that you have written about in spoken about For a very long time grants, your newsletter does investigate alternative investment opportunities. They you look for for places where you might be able to get a return that is above zero, right? That's how greedy we are. What we what we try to do in the spirit of not standing in line we to change the metaphor we run toward fires.You want to be right later as you've heard you yes, this is a wonderful wonderful Mo ball Bai Joe robillard who said the successful investing is about everyone agreeing with you later. I also like this other one that you said, it's like flesh this out. Sure sure. So we wrote about turkey in a favorable light early this year because the problems were will ventilated the risks were evident and the bargains we thought were more than compensating for the true risk associated with that very troubled country. We simply looked at Russia. During when it was even more out of favor than it is. Now. We looked at Banquets Burbank, which is a terrifically run institution that was being sold hand over fist, very few Ardent buyers sellers were Ardent because oil was going down because Russia was kind of a national a nation built around a big gas station and people thought Rush was going out of business. And so these are things we try to to look for opportunities where others see Risk principally and we tried to look at risk where others see sure thing. So that's that's the that's plan to meet you the quote I was going to say is that the other one I've heard you say which is I certainly don't ever want to say if I myself saying I used to be rich that's a line. I borrow from a friend of mine who is in the wealth management business at Brown Brothers Harriman a hold old firm firm and still a general charge shit George Bush Prescott Bush, I think yes, and this is Friend tell the story - he was a young banker there and somebody some text and came with a lot of dough and said, yes. I said just what you said. And saddest words in the language as you rich, I don't think it's a towards actually but Point survives an exaggeration. So Jim I really appreciate having you on I you know, I didn't know how exactly I want to do this because every time we've had a conversation on there, it's always been about sort of the philosophy and if interest rates of that I knew we had more time and I wanted to try and see if we could give people some actionable intelligence and maybe also prod you and some other some other things. It was my attempt to do that, but it was really wonderful having you on I certainly enjoy it. I think you're very funny guy. Bye and I've actually mentioned to our audience before how wonderful your conferences are and you actually have one coming up. Well how great opportunity? Yes, they're all the best one ever. But the one coming on October 10th is going to feature the conversation between me and Alan Greenspan certain Alan Greenspan. Yeah, and I'll ask him how he looks back at his time on the fed and what he makes of the institution of paper money and what he thinks of the world of Bitcoin and you know, like it's faster I mean Very excited for that. I actually had Sebastian mallaby on this program a few episodes ago. Yes, and we discussed allegory it was the entire episode was the vote Alan Greenspan, you know, we covered his 1959 speech to the American statistical Association where he talked about the wealth effect and asset price bubbles. So we explored the sort of the the the Alan Greenspan that existed prior to the Nixon campaigns and the Ford and everything else. It is fascinating is a very fascinating individual to study and I'm very jealous that you have the you know Fair opportunity to interview him that's going to be very exciting. How long are you going to have him there? Are you going to have them in Chains is gonna be like that? I'm gonna get my heart going to keep them get my money's worth. It's exciting. All right.

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