Jim Grant: 'We Have ... Artificial Prices Worldwide'
In this interview, Jim Grant nicely sums in a few minutes the basic problem of using asset price inflation in pursuit of economic enterprise. The problem is this strategy puts the cart before the horse.
“[There is] one essential monetary idea [in this world]. That idea is that central banks can and should manipulate – override – the price mechanism… I think this idea is a worldwide idea, but it had its genesis in the United States. Ben Bernanke was an early proponent of it. The idea is that you put the cart of asset values before the horse of enterprise. By raising up asset values, you mobilize spending by people who have assets… It was otherwise known as trickle-down economics before the enlightenment, then it became something much fancier in economic lingo. But that’s essentially the idea. So what you have seen is an artificial structure of prices worldwide.
“The prices themselves are the cosmetic evidence of underlying difficulty. So if you misprice something, it’s not just the price that’s wrong. It’s the thing itself that has been financed by the price. So you have perhaps too many oil derricks, too many semi-conductor fabs. We have too much of something, which is financed by an excess of credit or debt. That, to me, is the essential backstory to this morning’s difficulties. It’s the mispricing of asset values, led by central banks who think that by inflating or lifting up stocks, bonds, real estate, they will thereby engender prosperity…
“In capitalism there is meant to be failure. It’s like the forest floor. There is life, there is regeneration, there is death. Without that, what you find is a bunch of dead ferns. What we have in America, it seems to me, is more and more evidence of ‘ferninization.’ Radio Shack was an example of a business that was improbably surviving on the sales of extension cords in the digital age, and it had been financed with very leniently priced junk debt. What this does is to slow the metabolism of capitalism. So people say, ‘The Fed! These geniuses have succeeded in saving us from the abyss of 2000 and’ – Well, maybe. I doubt that. What they have given us is a system of enterprise that is much slower to change…
“The Fed wanted to stimulate so-called aggregate demand. So it prints money. It suppresses interest rates. It wants to have a lot of financial activity. But in so doing, it reciprocally stimulates aggregate supply. So there’s a lot more of everything – a lot of big cap ex, a lot of big production, a lot of oil. And the lot-of-everything weighs on price indices and the Fed’s like, ‘Oh, we’re not meeting inflation targets. What shall we do? We shall print more money, suppress interest rates for another…’
“Mispricing of debt does two things. It pulls demand forward, and it pushes failure out. So the junk bond default rate over the past 12 months has been the lowest in the 40-odd years in which the data has been collected – 2.3%, versus an average of something like 4%. So on its face, that’s a good thing. We don’t want people failing, because they might be your neighbor. And yet without that, without the dynamism thats success and failure introduced to enterprise, what you’re looking at is like in Europe.”