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A graduate of Indiana University, Grant, 64, was a Navy gunner's mate before sta

rting his journalism career at the Baltimore Sun in 1972. He then joined the fin
ancial weekly Barron's before starting Grant's Interest Rate Observer in 1983. H
e's also written seven books, mostly financial histories and profiles. His first
book was on Bernard Baruch, the pre-WWI financier and advisor to presidents. Hi
s latest is a profile of Thomas Reed, an acerbic and witty Speaker of House over
100 years ago.
As stocks were falling last week, Grant visited The Associated Press in New York
to talk about why it's not just stock investors who should be worried. Below ar
e excerpts, edited for clarity, from a wide-ranging conversation in which he lit
into the Federal Reserve for our current troubles, warned of 10 percent inflati
on and waxed nostalgic for a time when Washington had the courage to let prices
fall in crises rather than goose them up and prolong our agony.
Q: What's your view of the stock market?
A: The Federal Reserve has unilaterally taken it upon itself to levitate asset p
rices. It is suppressing interest rates. When you're not getting anything on you
r savings, you are inclined to go out and buy something, anything, to generate e
ither income or the expectation of capital gains. So the things that we take as
prices freely determined are in fact manipulated.
A few months ago, (Fed Chairman) Ben S. Bernanke, Ph.D., the former chairman of
the Princeton economics department, stood before the cameras of CNBC and said th
at the Russell 2000 is making new highs. The Russell! He sounded like another st
ock jockey. He was taking credit for new highs in the small cap equities index.
The Fed, as never before, or rarely before, is now the steward of this bull mark
et. One wonders what it will do if stocks pull back significantly.
Q: Are stocks overvalued?
A: Some big multinationals left behind in the past ten years (like) Wal-Mart, Ci
sco Systems, Johnson & Johnson appear to be attractively priced. But generally s
peaking, things are rich.
Q: What would you have done in the financial crisis if you had been in Bernanke'
s position?
A: Resign. I don't know. I have great faith in the price mechanism, in the mecha
nics of markets. I think there should have been much less intervention and we sh
ould have let some chips fall, many chips fall.
Before the Great Depression, there was a great depression (lower case `g') in 19
20-21. Within 18 months, the GDP was down double digits and commodity prices col
lapsed. Harry Truman lost his haberdashery in Kansas City. It was very painful,
but it ended. And the Fed, during that depression, actually raised its discount
rate and the Treasury ran a surplus. The reason it ended was the so-called real
balance effect -- that is, prices came down and people with savings saw things t
hat were cheap and they invested. That's the fast and ugly approach.
The slow and ugly approach is to mitigate, temporize and forestall to give us ti
me to work ourselves out of difficulties. That's the current approach. I think i
t's intended to be a more humane approach, but I wonder about its humanity. I me
an these college kids get out of school and they've got nothing. It's awful -- 9
percent unemployment and going nowhere except sideways.
Q: But Bernanke has succeeded by some measures. Big companies are flush with cas
h, their profits are on track to hit a record this year and the riskiest among t
hem are raising money at the lowest rates ever. Who could have imagined this dur
ing the depths of the financial crisis?
A: Let's go back to the previous cycle of 2002-3. Cisco Systems was for 15 minut
es the costliest company on the face of the earth, and digital technology was ab
out to raise every human being out of poverty. OK, so that cycle ends -- Bang! -
- with general disarray in the stock market. What do we do? Well, we press down
interest rates and we give residential real estate a little helping hand. What's
not to like? Home ownership rates are rising. Stocks are up. Risky companies ar
e issuing debt at levels never before imagined.
Who would have dreamt such an outcome was possible after the tech bust? And that
ended noisily and here we are again and our monetary masters have devised new,
even more audacious methods of stimulus. In three or four years we'll look back
and say, `Can you believe we fell for this again?'
Q: You've been warning about higher inflation for a while. How imminent is it?
A: I've been all wrong on this. I thought that this massive monetary stuff would
generate the conventional kind of inflation that would be expressed in much hig
her CPI readings. Not so far. But all things are cyclical and the seemingly impo
ssible is just around the corner. On September 30, 1981, the 30-year US Treasury
bond traded at 14 7/8 percent and I remember some crank, some visionary, was ta
lking about how interest rates were going to zero, you watch. Oh, yeah right. An
d so it came to pass.
It does seem improbable that the inflation rate would ever get beyond 3.5 percen
t, let alone knock on the door of 10 percent. But I'm here to tell you it's goin
g to 10 percent.
Q: Won't policymakers come down hard if we get even 6 percent inflation and try
to lower that?
A: Sometimes they can't control things. We had 6 percent inflation before. Washi
ngton is full of well-intentioned people. Ben Bernanke keeps saying that what we
really need is a little inflation. He says we'll get 2 percent or a little bit
more. You shouldn't even think that, let alone say it out loud. That's such bad
luck to tempt fate by saying that you can calibrate things like that. You can't
do that.
Q: So with inflation ahead, are you buying gold at $1,480 an ounce?
A: I am not buying it now. I have bought it in the past. Gold is a very difficul
t investment because its value is indeterminate. It is the reciprocal of the wor
ld's confidence in the likes of Ben Bernanke. I think the price will go higher.
Q: When did you first buy gold?
A: Well, my first misadventure with gold was standing in a queue in front of the
Nicholas Deak currency and coin shop, which was on lower Broadway. And it might
have been January of 1980 at the very peak but if not then, it was late 1979. I
almost top ticked it. That was before I learned never to stand in line to buy a
n asset. You always want to go where nobody else is in line.
Q: Let's talk about the dollar. Washington says it wants a strong dollar.
A: It's disingenuous when (Treasury Secretary) Tim Geithner says he's for a stro
ng dollar. What he means to say is the economy stinks and we need even greater o
omph from our exports and for that we would like a much lower dollar in a measur
ed, managed kind of decline. That's what he wants, and he wants it by November 2
Q: What's wrong with a weak dollar? Caterpillar recently said it is nearly doubl
ing its capital spending because the weak dollar allows it to sell more overseas
. It plans to spend much of that on factories in the U.S., paying construction w
orkers to build them and hiring people to work in them.
A: Well, that is the Caterpillar story. The whole manufacturing story in the U.S
. is very sunny, and it's in part due to the state of the dollar. But if (prospe
rity) were as easy as debasing one's currency, think of all the countries that w
ould be prosperous that are rather the opposite. Argentina would be booming. And
Weimar Germany would not be a story of failure but of success.
If the world were to lose confidence in (the dollar) we would suddenly be in a m
uch less advantageous financial position. The U.S. is uniquely privileged in tha
t we alone may pay our bills in the currency that only we may lawfully print. Th
at's our prerogative as the reserve-currency country. But it has seduced us into
a state of complacency. We never actually pay the rate of interest that we migh
t be expected to pay -- the real rate of interest -- on Treasury debts.
It's great for now that we're paying 2.5 percent or whatever on our public debt.
But wouldn't it be better if there were an accurate price signal that was telli
ng us that we're borrowing too much?
Q: If investors lose their faith in the dollar, what would replace it?
A: I think there will be a gold standard again in your lifetime, if not mine. It
's the only answer to the question, if not the dollar, then what?
Q: Where should people put their money now?
A: The trouble with the present is that nothing is actually cheap. My big though
t is that our crises are becoming ever closer in time. The recovery time from th
e Great Depression was 25 years. The stock market peaked in 1929. It got back th
ere in 1954. We had a peak in 2000, crash, levitation, then the biggest debt cri
sis in anybody's memory. The cycles are becoming compressed. The temptation to b
ecome invested at peaks of these shorter cycles is ever greater.
Perhaps one way to proceed is to hold cash at the opportunity cost of not much i
n Treasury bills. You make nothing, but you want to have this money when things
are absolutely, not just relatively, cheap. This time of full or overvaluation s
hall pass. On recent form, it'll pass in a thunderclap and there will be a panic
and it'll seem as if the world's ending. And that's when somebody who is nimble
can get fully invested in a comfortable way.
It won't feel comfortable, it will feel awful, but I think that's the way to do
it. I mean everything (you could invest in) is either uninteresting or rich, it
seems to me.
Q: What about Treasury bonds?
A: I think it's useful to imagine how things might look ten years hence. What wi
ll one's children, heirs or successors think about a purchase today of ten-year
Treasurys at 3.25 percent? They'll look back and say, `What were they thinking?'
The (federal deficit) was running at 10 percent of GDP, the Fed had pressed its
interest rates to zero, it had tripled the size of its balance sheet, and they
bought bonds? Treasurys are hugely uninteresting, as is similar government debt
the world over.
Q: Any last thoughts?
A: Because the Fed has coaxed or cajoled people into stocks, including many fina
ncial non-professionals, I think it has moral ownership of the market in a way t
hat no recent Fed has had. Either the stock market owns the Fed, or vice versa b
ut they are too intertwined now. If stocks pull back by 20 percent, how can Bern
anke just sit there and say, `I want a bear market?' I think he has some moral r
esponsibility for the finances of the non-professionals who bought.
Q: Does this mean the Fed might announce QE 3, a third round of quantitative eas
ing to lower rates and raise stock prices?
A: Yeah, it means QE 3 through QE N.