the. good afternoon and welcome to capital account i'm lauren lyster here in washington d.c. these are your headlines for monday september twenty fourth two thousand and twelve the best was once credited with what came to be known as the great moderation decades of remarkably strong and steady economic growth coupled with persistently low inflation but looking at today's era of fed policy would have been best described by this.

i'm talking about the great old levitation our guest jim graham founder and publisher of grant's interest rate observer will explain and as the euro zone crisis reportedly spooks markets germany continues to be the horn on the size of the money changers and germany reportedly says leveraging the e.s.m. to two trillion dollars is not realistic and after the buddha's bank voted against unlimited bond buying remember president gave a speech recently warning about money printing plugging gold as a medium of exchange a very interesting we'll talk to our guest about it plus what happens when j.p. morgan's a bullish i phone five g.d.p. forecast collides with fed ex is a recently reduced more bearish economic growth outlook well up what it looks like at the distribution center according to write it won't talk i phone five indicator

let's get to today's capital account. to bloomberg reports u.s. investors are buying treasuries at a faster pace than foreigners for the first time since two thousand and ten undeterred by record low yields that's pretty nice of investors to help enable uncle sam sixteen trillion dollars plus borrowing bench for nothing or less than nothing in return but does this mean they expect ben bernanke and his chief dinse to fail and their efforts at turning up the thermostat on economic growth and getting america back to work again and anyway how do you quantify the stimulus impact anyway the latest issue of grants interest rate observer cites

a paper produced by the federal reserve bank of new york titled the macro an economic effects of large scale asset purchase programs and in it the authors conclude that that asset purchase programs have become the norm today increase g.d.p. growth by less than a half a percentage point although the effect on the level of g.d.p. is very persistent while the programs marginal contribution to inflation is very small so exacting down to that less than half a percentage point let's turn straight to our guest though jim graham founder and editor of grant's interest rate observer in new york for more so first jim grant thank you so much for being on the show always work pleasure or the pleasure is all ours because first i just have a really simple question in light of that report you cited in your latest grant interested observer how on earth can one project with any degree of accuracy or humility economic growth for a fifteen trillion dollar economy anyway. one can do as you suggest but neither

with accuracy nor with humility. the contention of the federal reserve bank of new york that to this so-called quantitative easing a persistent one half of one percent or less a year to growth. is less than impressive when one considers first of all that the estimate probably can't be done anyway but secondly. that one half of one percent is to to strictly insignificant and furthermore that we've vision's to prior estimates of g.d.p. growth average more than one percentage point so it seems a most dubious claim for a dubious policy yeah every under remarkable figure is due and nonetheless the market has definitely been waiting for this round of q we pretty much since the last one ended they referred to it as q e three that was before we knew that it was

going to be q.e. unto eternity so what's your take on this latest round of q.e. and this policy and does it give you the sense that the federal reserve will do whatever it needs to expand its balance sheet for however long and however much it wants to until it achieves the economic results that it deems to be the right ones well it's what the fed says and. yes one gives them the benefit of the doubt it's quite an extraordinary thing when you contemplate. an arm of the government and indeed technically not even a fully owned subsidiary of the government. having the the capacity to to to form a judgment about what is desirable in the way of inflation and economic growth and then to create as many dollars bills as it deems necessary to achieve those necessarily arbitrary goals. i think you. which will be the day pronounced

the said the new fourth branch of government and its true that is it is a light show or. and what do you even think the fed would need to achieve in order to be satisfied. but we don't know it's up to the mandarins meeting in secret in washington. it's you know it's in the. i'm repeating myself more isn't it remarkable it's remarkable. the delegation of power by congress congress after all being charged in the constitution with the duty to. a coin money and regulate the value thereof congress has quite blindly pass this responsibility off to this now rather. truly unaccountable organization the federal reserve yeah and there's this issue of inflation of course

which the fed doesn't seem to know yes worried about but i want to bring up a quote jim grant that i think you'll like it's one that our producer has actually by his desk and ernest hemingway quote from the sun also rises and it reads how do you go bankrupt two ways gradually and then suddenly and no one could say the same thing about inflation and the purchasing power of currency which has gone down namely. all of a sudden boom the fed loses control of monetary policy and inflation takes off that's what could happen i know you've written before about the looming threat of runaway inflation but have you given any thought to how this would occur what do you think. it's possible that our next inflation will have something to do with our fiscal predicament. you know we have as everyone know was an immense debt and as everyone also knows this debt must be constantly funded. we are used

we privileged americans to to finding a better someplace for our debt we consume more than we produce we finance the difference with dollar bills foreign central banks obligingly take up these dollar bills and remit them to us almost instantly in the shape of new investments in treasuries and mortgages we've been at this form twenty five years constantly borrowing cost me finding the finance years of our deficits and we have come i think to believe that. this course of policy this course of market accommodation is is given to us as a matter of right well of course it is not given to us it is contingent it is contingent on the markets deciding that somewhere we have the capacity to produce the income with which to meet our distant or not so distant contingent liabilities now the present value of those unfunded liabilities what might one might call the

long term fiscal gap. credible academic estimates range from one hundred trillion with a t and up now. the real value with the debt ought to reflect america's expected capacity to produce those trillions of dollars in good money in income to service the debt well it seems a stretch to believe that any congress is going to whittle back our spending and ratchet up our income such that we do in fact enjoy the capacity to meet these maturing pledges with with with sound money so it's seems to me and indeed to others that. we are living the life of riley up until the moment when the world decides that no after all in truth we will not produce the good dollars with which to meet our maturing debts and you refer to it seems quite daunting and in

the present state of political play quite manageable so it seems to me that these these these yields on treasuries are in themselves nonstarters they have no margin . for error they are present as the value investing tripes is no margin of safety people are buying treasury securities it seems to be as much as anything out of out of muscle memory you know these bonds have been appreciating by and large for thirty one years that's the length of the bond bull market you know one hundred one so people buy it because previous buyers have done well it seems to me that future buyers will not do so well you know i want to just ask because i know a lot of people that come on the show not a lot but some that have a different take on monetary theory they say as long as the u.s. government can print its own money it's never going to be an issue for it to run these type of deficits and that the u.s. government because it has the power of taxation can always just continue to do this

so do you think it would be a situation where. the country's no longer are holding the u.s. dollar in reserves if this quantity or there was a failed bond auction from. just less demand what would really be a turning point to counteract all that say this is never going to be an issue where the congress has the capacity to tax but it also was asked for both of the people. the president's political advisor only last summer said approximately the summer of two thousand and eleven during the last. kerfuffle over the the debt limit. they've had proof of this perhaps because they want to vote but the president's chief advisor on politics said that. the. approximately that we will not just go about paying our bond holders who can't pay social security or we can't meet the defense budget. so they are saying that there is

a political contingency to the nation's willingness to meet its obligations to to its creditors. it's not such or a startling revelation or a revelation i suppose these things are all political but still it's right there in the public record. and people who say that. we can create all the dollars we like will they that is true that is literally true we can and we are but nothing says that the world must accept dollars at the value we wish to assign to them. this is recently is the late one nine hundred seventy s. if you are traveling in europe with american express travelers checks the roman hotel clerks look the other way when you try to present them. you know that there's nothing intrinsically valuable valuable about a paper dollar its value is is is is derived from the world's belief in the good faith of this country to make those dollars worth something so we can produce them

in for an item by definition right and i'm going to get a little bit later to what the president the buddhist bank said a recent speech about exactly what you're saying before we do before we go to break though i just want to put this in a global context as we often talk about the unintended consequences of federal reserve policy in the u.s. but liquidity can cause booms bust bubbles anywhere in the world and the u.s. dollar is the reserve currency so give us a sense of what the unintended consequences are globally. well in faraway hong kong real estate prices are through the roof because the hong kong monetary authority has had slashed the value of the hong kong dollar to the u.s. dollar so the hong kong monetary people simply take america's monetary policy. is there also they have zero interest rates and q.e. as far as the eye can see. but it seems not to be so appropriate for the prosperous city state now i guess special territory of hong kong they are looking

at a huge asset levitation in real estate now that is a consequence and you'll find nowhere mentioned in the federal open market committee meeting minutes but it is one of the reverberating away was the our money printing has set in motion worldwide aha you won't find that in the f o m c minutes but you'll find it here on capital count via jim grant we will have much more with you after the break editor of grant's interest rate observer and still ahead you don't want to go away well tom gold it with jim grant but first our closing market number is.

wealthy british sign the sun it's time to rise. market why not. find out what's really happening to the global economy. well max cards are for a no holds barred look at the global financial headlines comes a report on r g. i.

thought. i. would.

welcome back before the break we were talking about the federal reserve and of course it's not the fed alone the european central bank is swimming in some pretty deep monetary waters as well despite your unease wishes as we're often reminded remember the bank voted against o.n.t. and the buddha's big bank president yet recently gave a speech and frankfurt warning that money printing causes money to lose value through inflation and he clogged gold as a medium of monetary exchange and this was welcome that with disdain in this financial times op ed that said the man has never accepted the theories underlying the policies of the modern central banks and is reinforcing people's innate fears about the common currency so i want to bring jim graham back and he was talking about sound money before the break so i want to get his take i think it'll be a wee bit different than our friends over at the financial times op ed page so jim

grant tell us is young's vietminh just fear mongering over money printing any need to get with the program and get on with modern central banking. well i think the president of the bundesbank is would simply reminding his audience of eternal monetary verities he was borrowing from the great growth than from the great good for se in which the the whole bruce into the ear of the emperor the yes emperor or a little short of gold however if you sign this document. i will see to it that you have more than enough money. even a little more of that more than enough and indeed money cascades off the presses and that work proceeds from this work of art two hundred years ago or where it was published or perceives the most authentic anticipation of progress or i guess

retrogression of the inflationary cycle marvelous bit of economic insight by the german poet. so this was the text from which the president of the bundesbank drew his remarks. and as you noted more and they were. condemned this morning in a gentle fashion i guess by the still condemned by one of the very very fine thoughtful. f.t. columnist wolfgang one shell but what mr monk show i think failed to mention is that the doctrines of modern central banking his phrase. haven't worked don't work and in theory i submit cannot work. he. he charges the president a bonus money with fear mongering to which i say that our modern central banks by suppressing interest rates by manhandling the yield curve by by overriding the

price mechanism by printing money by the box carful our modern central banks have contributed to a constant state of apprehension among people who have money to save invest. what is it going to be worth we don't know as chairman bernanke he candidly admitted during his in a speech in jackson hole wyoming at the end of august he said we are quote learning by doing now those votes are fear mongering words i think that was specially first savers so in this financially repressive environment let's talk about what savers can do because i know in the past we've talked about your a thesis for black walnut trees but if you don't want to contend with actual weather what would you recommend as far as investments first savers anything else. well there are there are so yes there are some things to do all entail some risk getting out of bed does as well but these these are which we call businessman's

financial risk bill call them business people's financial risks to get with it. there is a class of income producing assets called mortgage real estate investment trusts the granddaddy of which is annalee the ticker is and that is a nancy l. y. it's been around for a long time it is written out many cycles and it has the scars to show for its experience yet it yields it does this and only in the double digits its price at about book value. one risk one bears with anneli and and similar. enterprises and there are at least a half dozen that worth looking at the risk you bear is that the fed continues to to milk the yield curve to news to press down on rates and thereby to to remove all spread between the cost of funds and the yield on one's assets that's the risk and

of this a clear and present risk and lee has done a very good job of hedging against and negotiating these risk that's one idea and another idea our mutual funds that invest in so-called leveraged loans which are senior bank loans to incumbent companies companies with some debt. these loans have in the past yielded per year of five or six percent they are senior claims the top of liver cap leverage capital structure they have they did well or well enough in two thousand and eight and two thousand and nine the prices the in a panic market went down but the assets came out very very well so i think that one might look at that these these so-called. prime rate funds or leveraged loan funds every big mutual fund company has one ok and then i want to ask you about another idea that you had in

a recent newsletter i'm sorry gold bullion international and it's a platform that helps someone to buy sell and store precious metals with the ease normally reserved for e.t.f. which is interesting because we've been we read some cautionary signs about g.l.d. it as the e.t.f. so what do you find compelling about g b i. g.b.i. is is a brokerage house like service that allows one set of merrill lynch merrill lynch trading platform to tap in the symbols for physical gold how much you want and where you want stored as easily as you might tap in the symbol for a bond or a stock or you know that the reason for owning physical gold as opposed to the gold mining share or a claim on an exchange traded fund that it's cell phones gold it is you kind of like want to have the stuff or if you can get you are going to write so. so which do which brings us to the value proposition presented by gold itself and if

you'll bear with me and i will remind our viewers that gold yields nothing earns nothing holds no conference calls it is necessarily for those reasons the earnings and the yield reasons it is necessarily a speculation it is a speculation on what i believe to be the high likelihood of it namely the continuing assault by our central bankers on the purchasing power of the currencies they print in such profusion still to speculation gold trades today what seventeen thirty five or seventeen forty dollars an ounce they could as easily trade at fourteen fifty it could as easily trade perhaps with more justification in my view at twenty five hundred dollars an ounce or three. but there's nothing there's no there's no price earnings ratio there's no price book ratio this is. gold is an

idea. anyway so why bullish on it but it's always count the odds ok real quick before we go i do just want to bring up this chart as it's very interesting is gold index to the monetary base and there's quite a correlation that i want our viewers to see so i want to know if you think central bank easing expansion of the money supply worldwide has been the driving force behind the rise in gold since two thousand and eight or if there is a larger four factors at play too because the metal has after all been in a bull market since two thousand. well it seems to me that the insofar as gold has a what we in the stock market call a fundamental. it is you know sort of the present gold to me is the reciprocal of the world faith what the f.t. columnist we talked about for called modern central banking now there's a phrase in so far as people trust modern central banking and its mandarins and its methods and its its wonderful florid bouquets of differential calculus if they trust all of that then gold should not be for them however if they entertain well

founded doubts in the efficacy and techniques of what our central bankers are doing then they might look at gold all right thank you so much jim grant dan your conference i should mention is coming up in october in about a month's time nick people can go to grant's pub dot com if they're interested thanks so much jim grant founder and editor loren grant's interest rate observer always a pleasure thank you lord. all right let's wrap up with loose change dimitri lauren let's talk about the i phone. here lo and behold you're one of those suckers that bought one this weekend none the less i phone sales missed axed estimates apple's blaming it on supply and

demand but i would have imagined they would have that you know. people were expecting another the last i want to talk about the i phone five indicator because remember j.p. morgan had estimated that the i phone five could add up to a point five percent of g.d.p. or what jim grant would maybe call invisible statistically can't really even factor that in but nonetheless also fed ex had said they were cutting global growth forecasts because they were concerned but then look at their distribution center because these are reportedly according to reddit this is the distro center there are these are all boxes of i phone five so i want to know how you think the i phone indicator is going to flush out is this going to actually be a boon to growth or is global growth. just slow regardless of what you know it's funny because i order the our phone. apple store but you know look the thing is at least this one actually has the economic growth of the other i mean it doesn't actually i mean i know it's a small group everything but this is a increased productivity. using which how does that increase your productivity you

could mean a lot of stuff i did first of all i tweet all day long as you could tweet on your old phone i mean it's the same thing ok well this is there's going to a large screen and i also want to be able to use dimitri lest we devolve into an i phone commercial i think you do exude some of the characteristics of maybe the. greater of being a consumer. however we're going to have to leave it there and see how the i phone five indicator shakes out on its own because that's all we have time for it thank you so much for watching be sure to come back tomorrow and in the meantime you know you can follow me on twitter at lauren lyster and go to our new facebook page we're going to put up the address i believe and give us feedback and like it and you can catch any show we missed you tube dot com slash capital account you can catch us an h d on hulu hulu dot com capital dash accounts and from air. no one here at the show thank you so much for watching come back tomorrow and have a great night. download

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