good afternoon and welcome to capital account i'm more and lister here in washington d.c. these are headlines for april twenty sixth two thousand and twelve a date is now set for the kick off of u.s. president barack obama's reelection campaign its may fifth so as we head towards elections and a debt ceiling debate mind you is the biggest tail risk for investors the intersection of reckless fiscal policy combined with jelly donut monetary policy will explainable talk about it with grants interest rate observer editor james grant and speaking of the fed yesterday it reestablished what our guest calls its midgett interest rate policy so our central banks doing this to the price mechanism of supply and demand.

i'm talking about waging war will discuss and you didn't think the fed press conference yesterday was just about trying to get clues about q.e. will burn inky took shots back at fellow academic paul krugman over accusations he isn't acting academic enough most talk about what's wrong with this picture but let's get to today's capital account. so while we're all still probably digesting a little bit the news out yesterday from the fed i'd like to bring your attention to some central bank news you may actually be more receptive to because last month

the federal reserve bank of new york and by did some of its critics including our guest to as he puts it unburdened themselves of their criticisms now the text of his remarks were published in the march twenty third issue of grants and it is definitely worth reading for those of you who are wise enough to subscribe now there are a number of points that mr grant makes in his remarks that we have repeated on this show ad nauseum ourselves accountability for bank executives a functioning price mechanism sound money you know capitalism but the editor of grant's interest rate observer also makes another very interesting proposal with respect to what he would do if by some act of market revenge he were made chairman of the monetary priesthood he would as he puts it commission staff and ceremonially open the fed's first office of unintended consequences now this would be his resists dong because economics after all is

a social science and as such is beholden to the unintended consequences brought about by the actions of the observer as much as by those of the subject be observed in other words the fed can't hope to objective lee understand the economy since it itself is the biggest actor in it so imagine if we designated responsibility for precipitation and cloud cover to executives at the weather channel now even if this new poll of the best intentions were do you really feel comfortable handing over control of the weather to a group of twelve unelected highly fallible human beings we don't think so and if you believe the weather system is not a fair comparison. to the system of money and credit we would beg to differ the weather as well as the economy are both chaotic systems they are dynamic they are organic they are not well oiled machines to be manipulated and driven from point a

to point b. at the discretion of some ceremonially chosen motorist no matter how pure or how well meaning his intentions may be but how would the economy function without those central planners and their open market operations how would this sacred rate of interest be determined without the shepherds at the fed surely there must be someone to guide the economy to help guide us in the pursuit of answers on this and other topics is james grant he is founder and editor of grant's interest rate observer and author of this book is the here mr speaker the life and times of thomas ve read the man who broke the filibuster and we are so happy to welcome him back to capital account so first thanks so much for being here mr graham. you are entirely welcome i'm delighted by the way i can report that it's raining outside new york city are glad to hear that there is a rainy day right now because that is fitting to talk about the federal reserve on

a rainy day so let's get right to it because as i mentioned you actually went and spoke with the new york fed last month and of course yesterday we heard from ben bernanke in a press conference after the f o m c announcement so did you hear anything in mr bernanke is remarks that maybe made you feel like your criticism and your advice has been heeded. not so much as one dependent clause you know my my speech at the fed was was a wonderful experience for me i'm not sure about my audience but they were most appreciative it seemed their applause was more than perfunctory and they left once or twice at the appropriate places but at the end of a most the questions were quite good there was one question that more think of a more telling it is of the federal reserve and what one might call its atlas complex that if it weren't there we couldn't get up in the morning and go to work and the question was i talked about the depression that ben bernanke you never

mentions which is the one beginning in early one nine hundred twenty and ending in big nine hundred twenty one brutal and ugly affair which however came to an end despite the utter absence of federal stimulus indeed the treasury balance the budget and the fed actually raised its short term rate of interest so i talked about this to the people in the audience of the new york fed and someone raised his hand and asked well wasn't there mass starvation no no there was no mass starvation. but i thought the question was so telling of the attitude of our monetary she said so well the monetary priesthood unless they are actively prayers and devotions who knows what might happen right and maybe the perception or the mythology around what happens in their minds if they don't act that's a really interesting anecdote let's talk a little bit more about what you've been talking and writing about because the

title of your latest news letter is for the price mechanism and it you say or write quote the world over governments and central banks are waging war on supply and demand on the price mechanism so you know how exactly do you feel they are waging a war on prices after all you know here i am thinking that we're in a free market free market prices so how do we explain. to be sure on the whole in america most prices. are not manipulated overtly by the federal authorities we don't have in this country as we hadn't seen in the early seventies of wage and price controls. but and this is a very important but we do have a controlled financial market we have interest rates manipulated indeed said by our master of the federal reserve system. chairman bernanke he gave a series of lectures to the students at george washington university

a couple of weeks ago and in these lectures he was asked about the wage price controls of the early one nine hundred seventy s. and he deplored them he said they were a terrible idea that they distort the economy and that prices after all said the chairman prices are the critical guiding mechanism of a market economy now that was the chairman talking to the students the chairman in his day job is busy suppressing the short term interest rate in this country at zero. and guiding or manipulating other interest rates just as critical as the federal funds rate the length and breadth of what we call the yield curve meaning the continuum of rates over time you know interest rates are the traffic signals in a market economy especially its financial economy that contribute critically to our perception of value in stocks bonds real estate what have you. and because these

rates are manipulated specifically suppressed. crushed. we live and invest in a kind of hall of mirrors we can't exactly be sure that what we're seeing is the thing itself or rather. the contorted image of the thing seen through the prism of the fence handiwork so let's talk a little bit more about some of the consequences that you perceive one of the speakers at your latest conference david einhorn a hedge fund manager he compared the fed's zero interest rate policy along with quantitative easing as a diet of jelly donuts that people are getting sick on and basically. the combination of this monetary sugar high along with reckless fiscal policy that this is actually what investors are perceiving as presenting a huge tail risk and that this could actually be depressing stock values in the long run what do you think about their analysis risk yes tail risk is one of these fancy terms for for over or over hanging anxiety or apprehension

about something that may not happen but if it does happen it will be deeply upsetting and it's my view that. that in this country in america there is this my asthma of anxiety of doubt of apprehension concerning our financial not canonical farrah's because of the sheer among other things because of the sheer unpredictability of of governmental action if we don't know and we do not know what they will do next we can't really plan for the future. if will the fed to keep interest rates its interest rate at zero through nineteen twenty thirteen through two thousand and fourteen well we don't know we we have opinions they tell us every six weeks or so what the members of this federal open market committee are thinking . but we can't really be sure therefore we can't really plan and therefore it seems to me the economy can hardly swing its legs out of bed in the morning you know it

is recovering after a fashion but the recovery is most holding most american this is a country that has the. characteristically and typically a kind of a a recklessly joyous way about it with regard to investing and and economic growth it delights does america in and going forward and in taking a chance in the future but if the future is manipulated significantly by our masters in washington a very. a kind of a subtle in as much as it's not really visible to the quantitative minded economists but it is. porton change comes over the mind of the people and so that to me is my are at that's my reading of the present day but notice notice two thousand and twelve is an election year in june i think the scream court is going to weigh in on the constitutional test which of obamacare and we have an election in the fall it seems to me that there is some chance and this would be very bullish indeed that some chance that that this that this governmental. war on

the institution the innocent and indispensable as titian of supply and demand that this war might be suspended significantly in which case i think it be terrific for america and its investors and what situation would the war be suspended. well. if for example obamacare if the presidents of all encompassing and i to be suffocating program federal regimentation of this important segment the economy was overturned that would be an important step towards the institution of enterprise and if. if the republicans won a big majority in congress and. romney won the presidency it seems to me the way would be open at least for congressional reconsideration of the remit of the federal reserve the federal reserve after all is a creature of congress so i. you know hugely disapproving of the way

things have been going. and many are but in my disapproval i don't mean to rule out a reversion to something like the characteristic american institutions of enterprise this is possible we might see them later this year that's interesting those are pretty high hopes for washington and sitting here and then it's hard to be optimistic about those kind of action actually ever happening i want you to stay right there we're going to go to a quick break but when we come back we'll have much more with you that's james grant founder and editor of grant's interest rate observer and still ahead from the gold standard to the ph d.'s standard is there any going back we'll have more with james brandon first your closing market numbers.

we just put a picture of me when i was like nine years old so if you told the truth. i confess and i am a total get of friends that i was driving him and pretty. but it was kind of the jester day. i'm very proud of the year has played. the odds. you know sometimes you see a story and it seems so. you think you understand it and then you glimpse something else and you hear or see some other part of it and realize that everything is ok. i'm charging welcomes a big picture of. what

drives the world the fear mongering used by politicians who makes decisions to break through it's already been made who can you trust no one who is you know who with a global missionary zeal where we had a state controlled capitalism is called sasha's when nobody dares to ask why we do our t. question more. welcome back we've been talking with jim grant about the fed's manipulation of the future so let's talk about what the excuse me of the present so let's talk about what this means for the future because another speaker at his recent conference was the deed lation wary hugh hendry and he laid out

a case that what will likely preceded the event you while ity of inflation is actually the polar opposite a severe deep lation and the collapse of mercantilism asia style now this is been one of the more popular debates raging in the financial blogosphere going on at least five years now we talk about this a lot so let's hear our guests for you on that let's bring back jim grant founder and editor of grant's interest rate observer so mr brown where do you stand in your view on this inflation deflation debate. i think it might be a good idea to to really define terms it seems to me that the deflation is is a drain joint of debt if there's a debt crisis you can't finance you can't borrow you can't hold him in tory's therefore you sell stuff you can't hire therefore you discharge employees the sum total of these actions leads to falls and wages and prices that to me is deflation . what deflation is not seems to me is the reduction in the price the

cost of producing things in a time of spreading digital technology and the opening up of new areas to enterprise and to production that i would call progress now the symptom of both is falling prices but the fed refuses to distinguish between. the problem of debt and progress they seems to be that seems to be resisting the latter which leads to intervention which leads to money printing which leads to the suppression of interest rates which finally it's to do to inflation so the fed by reacting to the thing it calls deflation but refuse to define him is actually instigating the final thing inflation now that's by way of preface you ask him which comes first and i'm glad i had so much time to search for an answer because i'm not sure right now warren. i think that in asia there is

a terrific debt crisis brewing it seems to me that the chinese financial structure is both corrupt and corrupting the banks are propped up by the stage prices are set by the state interest rates did oh this immense exercises in what the academics call mal investment we ordinary people might refer to as the production of white elephants great buildings without people in them shopping centers that shopping without shopping railroads that run off the rails so in asia it seems to me there. is the set up for a great collapse in prices i don't know i'm not sure anyone does know what comes first but i can see i can certainly see that monetary authorities the world over are doing their best to bring about inflation as interesting where do you think this goes as far as the way it plays out i'm curious if you have any ideas about alternative currency is that come about that are either determined by the market or

determined by some kind of international institution like the i.m.f. with s d r's. i think that whatever happens in a monetary future it will not involve special drawing rights or s.t.r. which is a currency only an economist could love indeed only a couple could understand or recognize as money but the monetary substance that is in front of us that is and is in our language apparently in our bloodstream is of course gold it's the thing that people recognize it's a universal an image i suppose is gold as a bubble hammad all the people the world over know what it is. the central banks of the world mainly resist the idea of gold as money although interesting the central banks have been accumulating gold collectively the past year or two as they haven't in a generation. it seems to me that the institution in place that it's a worldwide paper money the world wide manipulation of interest rates by euro

craps this monetary set up is not for the jews it is destined to fail in deed it is failing something will supplant it and it seems to me that something is very likely to involve gold whether it's going to involve a new gold standard that's my preference or whether it's going to have all involved say the other ron paul approach which is the dean nationalization of money through the abrogation of the excision or the whiting out of the fee currency system through the legal tender was so as it is now. says on a dollar bill that you have to accept it in payments of debt that's the law well if legal tender laws were no longer in place people could choose they could decide what is money as they view it it seems to me a much better system would be an international arrangement whereby we establish this universal system of weights and measures called money and we define it in that

thing which seemingly is meant to be money namely gold that's my preference well and that's interesting i know that you are and you've kind of laid out your support in your admiration for a classical gold standard whatever the faults that some people may perceive in a global banking system that where there is so much debt it is so awash in debt it doesn't mean it doesn't seem that this kind of monetary discipline would be what any finance year would go for so do you think that it actually is possible that there actually could be a movement towards a gold standard in reality. i think it is entirely possible and i think that. the people have just about had enough of our overfed needy and only sickly solvent finance years and the voice the collective voice of these financiers in the councils of state i think is is properly. being marginalized.

i'm not sure if the people are going to rise up in the next election i'm not sure what the voice of the people in this respect is exactly going to sound like or when it might be heard but i have to believe that people have had enough of zero percent interest rates for the savers for artificially supported prosperity for the undeserving finance years. i can i can see every political drive piece of dry tinder in place ready for the match i'm not sure when the match will be dropped and that's an interesting point all along the lines of those finance years what do you see as far as accountability because of course we've seen actions like dodd frank which have plenty of problems they haven't ended too big to fail are and start i know you do i was going to get to that but i think law back plan tell us about this and how it makes up for what dodd frank misses. so i'm going to give you two alternatives lauren and you can pick one must pick one you

must pick the second one ok the first alternative to. promoting accountability with the banking system is the two thousand five hundred and odd page don franc bill which micromanages the actions of our bankers by the way i submit to you that the only population in america knows less about banking then bankers today is the us congress so that's a choice a choice be the correct choice lauren is the eyes or claw back plan which i've named after my panel paul isaac a wall street investor who drops it up. this plan would require that anyone in a regulated financial institution making ten times the average manufacturing wage or more it's about four hundred thousand dollars and up and you were making four hundred thousand and up would surrender that increment above four thousand dollars for seven years preceding the insolvency of the institution for which he or she worked so the problem now as i see it is that bankers take risks they don't bear

risks what is wanted in a capitalist society is the the union of risk taking and and responsibility for actions taken what is wanted is capitalism on the upside but no less capitalism in the downside and it seems to me that that one could opt for the unworkable bureaucratic morass that is our current regulatory regime or one could could harness the venality of our bankers to the public good and say all right you know about banking or you should the bank for which you work in an executive position will be solvent if it's not you will not have the money you so seemingly desperately must have i love that whole idea i mean it personal responsibility personal accountability how you want to take these risks by now but your skin is on the line instead of the taxpayers you know i want to keep this going i'm sorry god yes. oh i was going to go for the ten to blow you go for not well no we have

a few minutes left and i want to keep you on through this last segment that i'm going to scratch because it's such a great pleasure to have you on the show so i do want to ask you about this because it has been roughly five years since the fed began what one could argue has been the most reckless experiment and money printing since that paper was digitized after world war two because assets must be bought in order for money to be created what exactly do you imagine the fed and other central banks that have done the same thing plan to do with all the debt they've accumulated on their balance sheet since the crisis in two thousand and one fear in fairness to monetary mandarins they do have a plan they do have a place in the plan for example the fed's plan. is to gradually raise the rate of interest it pays banks for keeping. about two trillion dollars. lying fallow as it were doing no harm on the balance sheet of the fed this takes just a moment of explanation so you mentioned in your question that in order to purchase

these treasury bills bonds and mortgages the fed must print the money to do so that's central banking one hundred one it does that it prints it materializes money that didn't exist before in order to buy the securities with which which through which purchases it manipulates our financial system so the question you ask is a very good one namely what happens to these bills bonds and mortgages that the fed and other central banks have accumulated in such unimaginable volume what will they go and do they have to have to sell them so that the fed's idea is that it will it will immobilise the dollars it created to buy these things by dexterously raising or manipulating the interest rate on the dollars that the central commercial banks have in deposit at the fed now that is perhaps partially intelligible but the central point is that the central banks believe that they have

the the nimbleness and the judgment in the foresight to kind of manipulate away these vast quantities of currency they have created to fight these wars against free interest rates. my suspicion in fact my contention is that the problem is not their lack of technical means to do something to forestall the day of of reckoning but rather the question of it's one of judgment or central bankers had no clue that our sorels were published in two thousand and seven and i think there will likewise be late to the party when time comes to do the thing they're promising to do. prevent the new inflation the ph d. standard that you refer to we're going to have to leave it there for today we're out of time i really appreciate you being here thanks for being on the show that was jim grant founder and editor of thank you lawrence interest rate observer and that's all we have time for thanks so much for tuning in don't forget to follow me on twitter at lauren lyster give us feedback at youtube dot com slash capital

account and for everyone here thanks for watching and have a great night. download

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