Jim Grant foresees a new American gold standard despite Wall Street’s stake in monetary chaos.
Mr. Grant is founder and writer of Grant’s Interest Rate Observer, perhaps the most iconic of the Wall Street newsletters. (Today, he will only say that his subscribers number between 5,000 and 10,000. At $910 a pop, you do the math.) He is also one of Wall Street’s strongest advocates of the gold standard, knowing full well it would take away much of Wall Street’s fun.
You might say that, as a journalist and historian of finance, he has been in training his whole life for times like ours—in which the monetary disorders he has so astutely chronicled are reaching a crescendo. The abiding interest of Grant’s, both man and newsletter, has been the question of value, and how to know it. “Kids today talk about beer goggles—an especially sympathetic state of perception with regard to a member of the opposite sex,” he says of our current market environment. “We collectively wear interest-rate goggles because we see market values through the prism of zero-percent funding costs. Everything is distorted.”
Mr. Grant is skeptical, scathing even, of the Japanese-style deflation fears that today motivate Mr. Bernanke’s monetary spigots. Good deflation, he says, is “when prices fall as a result of productive processes and technical apparatus, that is called progress.” Bad deflation is when merchants, drowning in debt and unable to get credit, dump goods at firesale prices. “The Fed refuses to make that distinction.”
Hence a horrifying irony: After the dot-com crash, Alan Greenspan and Mr. Bernanke drove down interest rates to fight a feared deflation and ended up inflating the mortgage bubble. “The Fed, in assaulting a phantom deflation, precipitated an actual one.”
Mr. Grant would prefer a monetary system tied to the amount of gold dug out of the ground to one based on the untrammeled discretion of Ph.Ds. The latter is what America got with President Nixon’s 1971 decision to close the Treasury’s gold window, breaking the last link to the classical gold standard, in which anyone was free to exchange dollars for gold at a fixed and guaranteed price. Result: the dollar, not gold, became the world’s “reserve currency.”
The U.S. government was empowered to borrow seemingly unlimited funds from foreigners and repay with a currency that the U.S. government itself could print. “Dollars pile up in Asia. Merchandise piles up here,” says Mr. Grant, as America, in possession of the printing press, has tried to achieve the “ancient hope of mankind, to live without working.”
The “fiat” dollar, he adds ruefully, “is one of the world’s astounding monetary creations. That a currency of no intrinsic value is accepted as money the world over is an achievement that no monetary economist up until not so many decades ago could have imagined. It’ll be 40 years next month that the dollar has been purely faith-based. I don’t believe for a moment it’s destined to go on much longer. I think the existing monetary arrangements are so precarious, so ill-founded and so destructive of the economic activity they are supposed to support and nurture, that they will be replaced by something better.”
But his point is an earnest one and brings us back to the modern character of Wall Street. The gold standard, he says, citing the “late, great” libertarian economist Murray Rothbard, was the “people’s system. If you didn’t like the currency, you could exchange your paper for gold and that sent a message.”
In our age of “wiki everything,” Mr. Grant finds it anomalous that we sacrifice freedom of monetary choice for the diktats of central planners acting out of the Fed’s faux-colonnaded headquarters in D.C. The fiat dollar is an “elite” system, he says, and Wall Street is its supporting “interest group”—those nimble, market-savvy, plugged-in folks know how to shuffle assets and exploit cheap funding from the Fed to leverage up their profits and soften the downside.
“Wall Street today is a statist creation,” adds the man who has known, loved and chided the Street for nearly four decades as one of its most able observers.