What Spins our World: Of Wingnuts and Establishmentarians

This week’s Barron’s (September 19, p45) has a Q&A with James Grant, that most erudite and astute of market commentators and investors, author of Grant’s Interest Rate Observer.  His definition of a bubble:  “A bubble is a bull market in which the user of the word ‘bubble’ has not fully participated”.  An observation he makes with which I concur is that much of the culpability for the present mess must be laid at least in part at the door of successive Chairmen of the Federal Reserve Board , for failing to distinguish between ordinary and desirable episodes of falling prices, and actual debt deflation, which they do need to combat.  He points out in the interview that “most Americans spend some part of the weekend hunting down everyday lower and lower prices”.  And with the expansion of the world economy in the digital age, “...wouldn’t you expect falling prices? That is called progress.  Deflation to me is trouble with debt, a symptom of which is falling prices.”

 In other words, debt deflation occurs when prices fall as a result of the distressed sale of assets in order to raise cash when debt servicing obligations become too onerous.  On an economy-wide scale it is indeed destabilising and needs to be counteracted by the central bank. When prices in general fall because of the increased participation of a new producer, say, China, on the global trading milieu and this results in lower prices for consumers, this is not harmful.  But if the central bank does not distinguish between the two, and seeks to combat each and every instance of falling prices in the cause of combating  “deflation” in a generalised sense, the result is lower economic welfare overall.

 Grant is also known for his still-extant long-run bullish view of gold.  But he also makes the point that we have discussed in our internal strategy meetings; that there can be no known true valuation for gold, that the gold price trades at whatever price the market determines on the day is the right price for gold.

  Also interesting in the context of the “On Current Stockmarket Volatility” note, Grant does not see the US as being in any way similar to Japan economically.  “Markets tend to clear. To the extent that we allow markets to clear we’ll be on our way”.        

Grant has just published a biography of a 19^th century politician Thomas B. Reed entitled Mr Speaker!. He says about what he learned in writing the book that, “in Reed’s day, the final quarter of the 19^th century, the wingnuts, the eccentrics, were those who argued for a paper currency uncollateralised by gold. Today, the eccentrics are the gold people. The establishmentarians are teaching at Princeton and running the central bank. I learned that cycles forever change and that wingnuts and establishmentarians change places, even before you know it. “