BRIAN LAMB: James Grant, when will you start worrying about the 21.5, at least, trillion dollars in debt?
JAMES GRANT: Oh, I've got a running start on this. I started worrying about it 1956 I think. I must confess to begin with, Brian, that I'm kind of Paul Revere seemingly without the British although I do know the British economy with respect to the debt.
LAMB: In what way are we going to see it? Because it doesn't seem like anybody cares.
GRANT: No, no, this is indeed a cold button issue. It's remarkable that way back when in 1993 I think, I'm losing the name of the -- yes, it was Ross Perot who was running for President and he called the public debt the crazy aunt in the crazy that no one wants to talk about.
Well in that era, in the '90s, people in fact did talk about it. It turns out that the debt was not such a problem because as recently as 1998 Bill Clinton said that he could see the possibility of extinguishing every last penny of it by the year 2015.
But nonetheless, in the 1990s, people talked about it. They stopped talking about it fairly recently, which on Wall Street is always a good sign that something is possibly about to happen.
When people lose interest in a particular company or a topic or a trade, that's at least a starting point for investigating, when something is in the papers, when it's on the tip of everyone's tongue, that's generally a good reason to stay away, but we now have the pregnant silence with respect to public debt.
LAMB: What do you do for a living?
GRANT: I write about markets.
LAMB: How can we see what you write about markets?
GRANT: Well Brian, all you've got to do is subscribe. Well, I have written recently for the most distinguished Weekly Standard publication. I wrote a piece on the public debt.
I review books for the Claremont Review, I publish a book every now and then, so some of my stuff is in the public domain, but I make my living by writing about markets in something called Grant's Interest Rate Observer which is much too expensive for some of the people out there. But indeed, I can see their point. But it's…
LAMB: That's our reference, in about 2013, it cost $1,000 a year. What's it cost now?
GRANT: About 1,300.
LAMB: What do you get?
GRANT: I'm not sure we have enough time, Brian. Well, what we try to do is to identify all that's good and many things that are bad. We want the best and the worst, an investment canon is would sell the worst and buy the best, so we are looking for things that are out of favor, cheap and therefore desirable as an investment.
We are looking for things that on the contrary are overpriced, overhyped, possibly corrupted in some fashion and those one would sell. We also offer comments on the general state of the world, principally with regard to monetary affairs, meaning the dollar, the rate of inflation, interest rates and the like.
LAMB: Why did you start the newsletter and how long ago did you do it?
GRANT: I started it 35 years ago, 35 years ago and I did it because I was having a tough time at Barron's, my then employer, there was one of these kind of spiteful intramural political arguments in the staff and I was kind of alongside of it, which is by the way is not the time tested reason to start a business.
I'm not sure why you started C-SPAN, but I dare say I'm going to guess it was not because of some tiff. But that was, I'm afraid, the rather uncompelling reason for my leaving.
And I thought, "Well, I got to go work for someone," or do I? I didn't especially want to be rewritten by the editors of Forbes or Fortune or The Wall Street Journal as good as they were and are, so I set off on the preliminary miscomprehension that world did not have enough to read. It turns out, Brian, the world has a great deal to read.
LAMB: Was there ever a time in 35 years did you think it would not make it?
GRANT: Oh yes. I was like, it was three years before I could take a salary.
LAMB: Three years?
GRANT: Yes, my wife was an investment banker for Lehman, so long ago. It was 1985 that Lehman was still solvent. And there was a time about that moment, mid '80s when I took the envelopes to be mailed to the then extent about 40 subscribers and left those stamped envelopes at the back seat of a taxi cab.
There with the liquidity of the business, right there, but fortunately I would say, we surmounted those growing pains and now look, it's OK.
LAMB: What would an average reader be, what would they do for a living?
GRANT: An average reader perhaps is, buys low and sells high for a living, he or she is a professional investor most likely. We have many who are not, who invest for their own account independently and it's principally a publication for people who have a serious interest in investing.
LAMB: Why did you write a book about John Adams?
GRANT: I wrote a book about John Adams because I could not stand the financial markets in the late 1990s. There's another good reason not to write a book, but from the time I was in college I have been smitten by John Adams by his bloody-mindedness, by his high-mindedness, by his selflessness, by his inextinguishable patriotism and did I mention bloody-mindedness.
So I thought to myself around 1997 I started, you know what I'm going to do, I am going to step away, nights, weekends, the 4th of July which of course is the point when one writes books, I'm going to step away from Wall Street and I'm going to undertake this great project and dilletantizet.
I, the interest rate observer, will write a life about John Adams which I did. And it was called Party of One alluding to his aforementioned of bloody-mindedness. But I have a great -- well, I think as you will appreciate, it's ever so much better to have written than to write, and I look back at that project with great pleasure and pride.
I so enjoyed his biographical company, you know, when you write a biography, you're in the company of your individual and he or she never leaves your side, he doesn't have a job, doesn't go out at night, stays there at the weekends, your family may sicken of the company of this said person.
And my family, I dare say, got a little bit tired of the omnipresence of John Adams, but I never did. I certainly got tired of typing, but as to his company, I never tired of it.
LAMB: Who introduced you to John Adams?
GRANT: Well, I suppose a librarian. In Bloomington, Indiana I guess.
LAMB: I saw that Robert Ferrell, the well-known, he's deceased I believe.
GRANT: Yes, he is.
LAMB: Historian who's been on this program was one of your professors. What do you remember from Robert Ferrell?
GRANT: Well, we were sitting in one of these big lecture halls in Indiana. Indiana has a state rule, no class can be smaller than 500 people, and it was one of these mass lecture halls and it was springtime.
And the windows were open, giving out on a third avenue if that's in fact a geographical fact, in any case a heavily travelled thoroughfare in Bloomington.
And a car boomed by, it was a Mustang, all hopped up Mustang and made its presence known and Professor Ferrell casting a disapproving glance at this very, very loud vehicle, this self-important vehicle, turned around to the class and ruminated and he said, "I wonder how many books the cost of that car would buy?"
I so loved this man. I had the privilege of writing his obituary for Wall Street Journal and elsewhere. But we stayed in touch and he was a lifelong mentor. I dearly love Robert Ferrell.
LAMB: What was special about him?
GRANT: His generosity with respect to his students but also his tireless scholarship. I mean he wrote 60 or 70 published books. He never quit.
And he would write these monographs published by the University of Kansas Press would get the medium hello by the established book reviews, but some of them were news breaking. I'm not sure if you interviewed him before or after his monograph after Douglas MacArthur.
He rather proved that Douglas MacArthur was a kind of a fake with regard to a Congressional Medal of Honor citation in the First World War. I think I'm getting my facts right. But in any case, he did have the goods on Douglas MacArthur. He was a remarkable scholar and the most generous professor.
LAMB: By the way how does somebody who's born in New York City area find their way to Indiana University?
GRANT: Well, if you may not know, Brian, I am a French horn player or I was and I was very serious about it and I quit and joined the Navy when I was -- I joined the Navy when I was 17 and two days old.
I joined the Navy Reserve which committed me to two years of active service. And I chose to take those two years after one semester in college during which I played French horn rather seriously.
And I went to the Navy, came back and I thought, well, I'll pick up where I left off. And I got admitted to this mecca of French horn playing, the music school at Bloomington Indiana, IU, Indiana University.
So I drove -- I'm not sure how you got around after you got out of the Navy Brian, but I saved my money and I got a 1957 Mercedes Benz 190SL. Can you imagine the prospects of a 20-year old veteran, mind you, a veteran returning to college with that kind of automobile?
Well, I drove up to Bloomington, Indiana and dropped in the music department and I announced my presence to one of the professors and said, "I have been accepted as a French horn player." And he said, "Oh really, I've never been."
It's a most downcasting and rather deflating beginning and I only lasted for like six months among these truly talented musicians. I was very nearly talented myself. I was diligent which there's a difference as you know.
LAMB: By the way, what impacted the -- how many years in the Navy were you on it two year?
GRANT: Two years. You have been quoted as saying that your naval experience and you had five years, and you must be a ROTC, you know, an ROTC guy.
LAMB: No, I wasn't. Actually, I was an Army ROTC guy, I went in Officer's Candidate School.
GRANT: Yes. Well, I was only two years active, but it was such a formative and important experience, my goodness and it's something that you never, ever do again, you know.
LAMB: And what years were you in the Navy?
GRANT: 1965 to '67.
LAMB: Did you go near Vietnam?
GRANT: Near, but not in, difference between -- yes. I tell people when they at least feign or express gratitude for my service, I tell them seriously and truly that I would have been at greater risk driving the family Ford Fairlane on the Long Island Expressway at the age of 19 than I was manning a 5-inch 38 caliber anti-aircraft gun aboard the USS Hornet, we never got shot at.
But three of my -- three or four of my friends aboard the Hornet, so we had one tour what they call West Pac. We were off North Vietnam or South Vietnam. We watched the Soviet ships steam into Haiphong delivering those missiles that shot down Americans.
So it was an important experience. It was not, you know, it was not dangerous. But anyway, so with that said, we got back to Long Beach, California, our home port and so we felt, some of us, that we ought to do more for this war.
We didn't closely read the State Department's handouts that were in the ship's library on the SEATO Convention that got us embroiled in this, like that was a little above our pay grade, but three or four of my friends re-enlisted as I say, shipped over for the privileged mind of you serving for another four years on swift boats on Vietnam. They had to ship over for four years for that. So that was the -- another aspect of the Navy in those days.
LAMB: Another name in your past is Jacques Barzun?
GRANT: Jacques Barzun, yes. God, I…
LAMB: Who was he?
GRANT: He was a great scholar of the history of culture and he wrote such things as Darwin, Marx, Wagner, and I had the great privilege of taking a class on one semester worth of Barzun when I was at Colombia, before I got into Indiana. I took a two-year course in something called international relations.
You'll tell me later if you don't -- I never discovered what it was about exactly, but I was able to read books for two years, and the most pleasurable of that reading is under the tutoring of Jacques Barzun who seemed to know everything about every cultural event.
He was present, I think, at -- he told us in class -- he was present of the opening night of The Firebird in Paris, I think 1913. That was a very notorious opening performance.
Anyway, so here was this man, this contemporary of Stravinsky, this contemporary of so many 20th century cultural figures and he was a biographer of Hector Berlioz. So I so loved his presence, his scholarly presence and I went to see him once.
I got into my Brooks Brothers blazer, brand new of course and tie, naturally and I went to see Professor Barzun who had an office in one of the more dignified Colombia buildings. And this was the time of the student riots, must have been or something.
I was the only guy on campus wearing a necktie, except for a couple of professors, and Professor Barzun received me. He was somewhat distant. And he didn't mean to be chilly or patronizing, but that came through slightly. I asked him how one became self-read. And he said, why, read. So I've been reading. It was good advice.
LAMB: Why then or how then did you think you wanted to be a journalist? You went to the Baltimore Sun for a while, what was the drive there?
GRANT: I wanted to be in the way of writing. And whether that was editing books which I thought about or whether it was writing for a newspaper or doing something else, I wanted to have something to do with the written word.
And so 1972 I guess I applied to about 100 newspapers. It was not a very good year for journalism. By the way, there have not been many great years for journalism since as far as going concerns, newspapers as going concerns, but I did apply to all these dozens of papers.
And with the greatest of good luck, the Baltimore Sun said yes. It was the only that did, these hundred or so. So I went there and got a, started writing about fires and writing obituaries and covering other such things.
LAMB: Then to Barron's and then to your own newsletter.
LAMB: Well, in all the time, 35 years of doing your newsletter, what were the high moments, if you were pitching your newsletter, what were the high moments of where you've predicted what the market would do?
GRANT: Well, our greatest I think moment was the events leading up to and culminating in the sorrows and trials of 2008. We had a very early read on what was going wrong in the housing business. We knew that the houses themselves were overpriced.
We knew that the mortgages that finance those houses had been packaged in such ways as to render them uncreditworthy, these notorious collateralized debt obligations and mortgage backed securities of one kind or another, these feats of financial engineering that turned out to be not such feats at all.
And thanks to such forward-minded prescient leaders as (Alan Fornie) for example, we got an early read on the immense documents that describe the innards of these securities. These things can run for hundreds of pages.
And I sat my analyst, Dan Gurtner, down and I said, Dan, plopping one of these tomes on his desk and I said, "Please study this and tell me what it says." And he came back two days later and says, "I can't figure it out." And I said, "Aha, we have a story." And not many people tried to figure it out but we think we did.
And, indeed, many of the things that we've said unhappily came true in 2007, 2008 and then something else I'm proud of, we turned properly constructive or bullish as we say on Wall Street in late 2008 into 2009, and I've been quite fairly known over the years as someone who had way too many false positives testing for things that could go wrong, bearish probably too frequently. But we had a very good 2007, '08 and '09.
LAMB: Other than the market numbers which have gone quite high since that time, what's happened to all the language that we generalists heard that credit default swaps, the derivatives, all the different things that we talked about back in 2007, 2008 have we recovered in that world?
GRANT: Some of the esoteric things have come back and they say the - the designers say in much safer forms. Some of these structures have been retired, I think, for good.
LAMB: Like what?
GRANT: Oh, come to think of it, I'm going to withdraw that because I just heard the collateralized bond obligation is another one of these things, is back. Let me give you an example.
There's something called the collateralized loan obligation which is a confection of bank loans. Now, they're called leveraged loans which would seem to be a redundancy. Leveraged loan means debt. Leverage means debt. It's like a botanical garden, if the garden is botanical. Or existing houses they say. All houses exist.
So, leveraged loans are things or these loans that are packaged together as structures and you can get a different part of the loan. You can get the riskier part which they kind of structure so that there is a riskier segment. You can get the safer part. These things are backed.
And they are meant to be safe now because they were safe in 2008. They had a very good 2008. But what's different is that the underwriting standards of these loans have diminished substantially. And the CLOs, the Collateralized Loan Obligations, which they are in fact, we think, not so safe even though they were safe then.
LAMB: For the average person, and this isn't for the investor that's reading your newsletter.
LAMB: Who's cheating us?
GRANT: Well, we are - collectively, we are the willing or at least inattentive victims of much of what's going on on Wall Street. Wall Street is kind of there with what it does for a living, one branch of the investment management business, seeks to buy low and to sell high.
Another branch, the investment, the securities manufacturing arm, the investment bankers, bring various pieces of paper to market; they call them stocks, bonds, structures of one kind or another and they want to sell you something.
And then there's a third branch is the investment research branch and the investment research people are not exactly disinterested observers of the scene as (inaudible) to be, these people are in fact partisan as they are selling something as well.
So, Wall Street means to sell you something. And it falls to the customer to realize that and to be on one's guard. One can't absolve Wall Street of venality. Wall Street is venal for a living.
I don't know, I think the trouble lies not so much in Wall Street as Wall Street is what it is. It's been a name either not so widely revered, but mostly an infamous name I would say. Wall Street is an epithet mostly in American history, right?
But I think what we ought to be more on our guard about are the institutions in the federal government that are avowedly benign in their intentions.
The Federal Reserve, for example, and the Department of the Treasury and the Securities and Exchange Commission, these institutions were set up as benefactors for the public, but I think increasingly they are not so.
I'll give you an example if you'd like. The Federal Reserve rode to our rescue in 2008, and the Fed as it's familiarly known imposed the lowest interest rates by some measures since at least the Middle Ages, by other measures worldwide interest rates, all central banks, the work of all central banks, imposed interest rates the lowest in 3,000 years.
And what have these rates done? Well, they have nudged investors into taking risk they might not have otherwise taken because you get nothing at the savings bank.
So, getting nothing in a Treasury bill, or savings account, well I think I will take the advice of Ben S. Bernanke, the Chairman of the Federal Reserve in 2010 and 2011 who said really, the Russell 2000 Index which is an inside baseball thing as an index, the smaller companies kind of the sportier stocks.
Russell has been doing very well since Chairman Bernanke and the Washington Post op ed and kind of advising people they ought to think about investing in stocks. Well, all right, stocks have done very well. But who's going to tell those previously risk-averse savers when it's time to get out?
So, you ask who are the culprits and I think the public in its inattention is one that is guilty to a degree of our collective financial sins, I think that our financial stewards are guilty and Wall Street, I think that the government is guilty is as well. So, that means nobody is guilty, right?
LAMB: You wrote in the Weekly Standard articles a couple of months ago the second trillion dollars of gross federal debt came on the books in 1986, four years after the first. $5 trillion was the grand total in 1996; $10 trillion in 2008; and $20 trillion in 2017.
I guess, as a generalist, I would say how is that possible? You say the first 190 years we didn't spend a trillion dollars in debt for the first 190, how is it possible that in the last 20 years this thing has gone completely…
GRANT: Oh, it's the facility of borrowing, it's the ease of borrowing. We live in a remarkable era. For one thing, the dollar is not a thing, it is increasingly kind of a concept.
You can fabricate a dollar if you're the government for the cost of nothing really, you type on the keyboard of Federal Reserve and you can materialize dollars.
It used to be until 1971 that a dollar was at least in law defined as a weight of something and that something being gold bullion. One three-fifth of an ounce of gold was the definition of a dollar.
LAMB: Why did Richard Nixon go off the gold the standard?
GRANT: It was expedient to do so. But since 1971, we have been able to materialize dollars ever so easily. And this facility has given us the means of borrowing and servicing the debt, so, too, has the collapse in interest rates since 2008.
And so, too, has the political doctrine that the government ought to be very active, it ought to be an interventionist government. It ought to be our helpmeet.
I mean ought to be catering to our needs whether they are corporeal or spiritual, the government ought to be there for us. That's a doctrine I say of statism. And I think the combination of the political doctrine of statism on one hand and...
LAMB: What does that mean, statism?
GRANT: Statism is - well, I'll give you an example. This comes from Paul Volcker's new autobiography. Paul Volcker describes Washington D.C. when he first got there to serve in the Federal Reserve Board in the 1970s I guess, '60s or '70s, and he said Washington had one four-star restaurant.
It was a place mostly of middle class, middle grade civil servants. It had a certain charm about it and he said today, Washington is chock a block full of the most fabulously rich people. It has more four-star restaurants you could patronize with all of your billions. And he says, quote, "I stay away."
Well, statism describes the constellation of ideas that mobilizes wealth in Washington and that impels the legislation that govern so much of our lives. Remember the name Vivien Kellems?
She was a tax protester who got started in 1946. In 1945, the war ended - World War II ended. And with it supposedly was going to end federal income tax withholding. That was a wartime emergency measure.
So, all businesses had to do the bookkeeping on behalf of the government with, and she was an entrepreneur was Vivien Kellems, doughty Connecticut entrepreneur. She said, "Nuts. Why have I got to do the government's work? There is a constitutional provision against involuntary servitude. Let us sue the Feds," said she.
And the IRS did not cotton to this. And in part it did not cotton because the Justice Department was not so keen on the strength of the government's case. Anyway, Vivien Kellems lost this battle obviously.
Now, all of us look forward to April 15th when the government will give us back some money and how grateful we are.
Vivien Kellems, before she died in I think 1975 said the Internal Revenue Service, the tax code is a hydra-headed monster, why it runs to 1,700 pages. Now, just how long the tax code run today is a matter of some contention, but you can't go wrong if you call it 75,000 pages.
So, that's statism. So, it's the all-enveloping grip of the government on our lives now, anyway some people like it.
LAMB: You wrote in that article, if statism is the debt-facilitating doctrine of the left, growth is the debt-rationalizing ideology of the right. Pro-growth conservatives preach correctly that only a strong economy can produce the goods and services with which to meet tomorrow's vast entitlement bills.
But these happy fiscal warriors forgot that the government has a balance sheet as well as an income statement. They carelessly overlook the risk that the worsening federal finances themselves could undermine economic growth. How, how can it undermine economic growth?
GRANT: Well, in 1978, the U.S. underwent a crisis of confidence, that is to say the foreigners lost their confidence in us. This was during the Carter administration, the rate of inflation, you're much too young, Brian, but you could look it up, the rate of inflation was nearing double digits, it had not yet achieved that dubious level.
And the Treasury deficit was then seeming to run amok. There was no discipline in American policymaking said our foreign creditors. The U.S. had abrogated five years or six years earlier its promise to pay gold on demand for dollars.
And generally speaking, America was in bad odor in Europe on the level of finance. And the U.S. could not, we had difficulty financing our debt. Then, the debt, mind you, was one half or 40 percent of what it is now.
LAMB: Percentage basis?
GRANT: Yes. So, people talk about these things and it's somewhat tedious to go into too much detail.
But if you were to look at the debt that is in the hands of the public, not the debt of the federal government holds on one hand and then it owns an asset on one hand and accounts a liability on the other, if you X that out and just like the debt that you and I might hold for example, foreigners might hold, even the Federal Reserve, if you look at that debt, it's called debt in the hands of the public, that was like, I don't know, 35 percent of GDP then call it. Now, it's, I don't know, it's whatever it is, 75 percent call it.
So, the people will tell you today, the debt is really not a problem as Brian would say, until it reaches some threshold and they'll say 102 percent of GDP or no, the debt is a problem when our creditors won't roll over the loans, that's when debt's a problem. And nobody issues a press release saying next month the creditors will refuse.
LAMB: I don't know what the latest number is, maybe you do, the number of dollars on the average person's credit card or the average family is something like $9,000.
GRANT: I don't know that figure.
LAMB: Does that sound bad, good, or indifferent? Does it matter?
GRANT: Well, I guess, when seeking to determine whether debt is a lot, a little or just right, you always look at the capacity to service it. And what I do know is the average American in the Federal Reserve survey, the average American had difficulty coming up with $400 or $500 in the event of an emergency.
So, as a nation, we are rather short of walking-around money. So, $9,000 if that's the figure, it does sound a little bit seep.
LAMB: So, what are the warning signs that things are going in the wrong direction for you?
GRANT: When the interest rate that America pays in relation, for its debt, in relation to the interest rate that other countries pay to service their debt, when our rate rises relative to others, that's one warning sign.
LAMB: Rises above them?
GRANT: Yes. Well, we are above some. We are above the rate the Germans pay. We are even above I think as we sit here, the rate that the Italians pay. The Italians are having difficulty within Europe financing their debt.
Although that rate has been suppressed by the exertions of the European central bank, their own Federal Reserve is suppressing interest rates in Italy and in Europe and Italian debt is the beneficiary of that suppression.
So, the dollar exchange rate, too, if that weakens inexplicably, that might be a sign that the world is tiring of servicing our substantial debt.
LAMB: So, explain the Federal Reserve. If I go visit the Federal Reserve, it's right there on Constitution Avenue in Washington, is there money in the basement?
LAMB: I mean, this sounds silly, but where's the money and how much do they have?
GRANT: That is the best question this fiscal year. Well, the money is now - well, there are two kinds of money. There is the legacy kind we'll call it, that's gold bullion. And there is a great deal of it stacked in the basement of the Federal Reserve Bank of New York. And you can visit that gold if you know the right people.
LAMB: Why New York?
GRANT: Well, because the Federal Reserve Bank of New York is kind of the, it's the headquarters of the true financial arm of the Fed. Washington is the administrative center. Washington is where the great - the governors, the Federal Reserve will meet, the Federal Open Market Committee will meet to determine policy.
They will sit around the big table and noodle about interest rates. But you want to look for where the gold is. That is lying inertly although it's lovely to look at in the basement of the New York Fed. So, that's one form of money we have; some of it's in Fort Knox while the foreign gold is in New York.
LAMB: Do we know how much that's worth?
GRANT: I do not.
LAMB: I mean, it used to be, what $35 to the ounce or something like that.
GRANT: Right. It's closer to 1,200 and something to the ounce today as we sit here. So, it's worth as Jake Lamotta would say a lot of money if you say it fast. But that's the material kind.
But far more consequential to the world these days is the immaterial kind and these are the digital entries in the Federal Reserve books and they are weightless, as I say, they cost nothing to produce and they are really the substantial dollars in the world.
We also have paper money, of course, the 100 dollar bills, the 50s, the 20s, the 10s, and that circulates. Interestingly enough, most of that circulates outside of the United States. I think I'm correct in saying most of it, certainly a substantial portion circulates in foreign countries. The dollar...
LAMB: So you're saying literally and you used the word fabricated earlier that in the Fed, it's all on paper. Do you move the decimal point?
GRANT: Yes. Nothing could be easier.
LAMB: Is it that simple?
GRANT: Yes. Yes. Ask them to demonstrate the creation of a billion dollars and it wouldn't take them a second.
LAMB: You mean if we went there and said show me the billion dollars, they have to show you a piece of paper?
GRANT: No. They just - piece of paper is rather old school.
LAMB: They have like a digital readout?
GRANT: Yes. So, since the year 2007, the Fed has materialized out of the thinnest of air about, more than $4 trillion and world central banks collectively have materialized upwards of $10 trillion. And they could - if Alexa had been in business in 2008, they could have spoken the commands rather than having to type them.
LAMB: Could you explain quantitative easing that we went through in the last 10 years and what is it and - was there real money involved and what happened to it.
GRANT: Well, quantitative easing is that fancy term describing the materialization of dollars that didn't exist before the Federal Reserve typed them into existence. Now, it works this way, so the Federal Reserve will say to JP Morgan, say, we are buying from you if you will sell us $1 billion of treasury bills.
And Morgan will say well, price is right, we'll do it. And the Fed says, "the price is right, done." So the Fed will pay for those billion dollars of Treasury Bills by crediting JP Morgan's account at the Fed.
JP Morgan has an account at the Fed just like you and I might have an account at JP Morgan. And the billion dollars did not exist until the Federal Reserve typed it into JP Morgan's entry in the Fed.
LAMB: Who can have an account at the Fed?
GRANT: Banks principally.
LAMB: Any bank?
GRANT: No. There is a select several dozen, they're called primary dealers. So it's a coterie or this is a safe word.
LAMB: So explain somebody who saves, they don't do market which wouldn't help you. But if they save and the interest rate is 0.4 on their savings account, but the bank is getting that money at what rate?
And they - I mean does it end up that the public subsidizes the bank in order that they can loan money at a very low rate to the…
GRANT: Correct. Well, the public, the dear public has been subsidizing the banking system for a long time. But way back when in 1984 the Continental Illinois Bank failed and the government refused to allow it to actually go broke and to be liquidated.
And that was the first iteration of the doctrine, the first application of doctrine too big to fail. So too big to fail is the idea that banks uniquely among commercial enterprises are already protected by the government because of the nature of their business.
That is to say, dealers in debt what banks do is borrow from you and me and they lend other people, they are dealers in debt. And the government has determined that they are much too important to our financial life to be allowed, big ones, to fail.
So that's one element of the subsidy. Another element of the subsidy is recently in the past 10 years or so has been the suppression of interest rates, giving banks a fatter margin so that they can borrow from you and me. When we're depositors we are actually lending our money to the banks.
They are borrowing from us, so they borrow at a cheap rate, in fact, the rate has been often as much as or as little as nothing, right? We would gain no money in our - substantially no money in our deposits to banks over the last 10 years.
But the banks don't get no interest when they lend or when they buy a security. So the Fed has been rebuilding the depleted coffers of these banks, lo these post crisis years by fixing it, so that the banks can earn what is called a spread between what you and I earn on our deposits on one hand and what banks earn by borrowing, by buying Treasury Bills or lending to a business on the other.
LAMB: So if I said, Mr. Grant, let's go to Washington and go to the Social Security Administration, I want to see where the money is, what would happen? What would you find there?
GRANT: Well, I think that you will get a quizzical glance. I don't think the Social Security Administration - oh, yes, the Social Security Administration does have a trust fund.
And that trust fund is the collection of IOUs that the Treasury leaves at the Social Security Administration when it's spirits away the dollars that you and I remit to the government to satisfy our taxes to it.
LAMB: So there is no money really there.
GRANT: Well, there are Treasury securities and you will hear people contend and they have a point that the Social Security Administrations, IOUs the Treasury lives there with them or that after all they are no different than bonds, right? They are promises to pay.
In a way, I think it's a bit of sophistry myself. What happens when we pay into the Social Security Administration is that we send our money as if we were servicing a life insurance account or annuity, right?
That's the optics. We send our money there. And the Social Security Administration saves it, but actually it delivers it to the Treasury and the Treasury pays the soldiers, the sailors, the pensioners of all kinds, it buys $50 toilet seats, whatever it's buying these days.
But it leaves with the Social Security Administration chits or IOUs as you put in a coffee can. Say you spirit away some of your spouse's egg money or something. You leave a little note there saying, "Honey, I took a 20 just for today." That's a little bit how it works with the trust fund.
LAMB: What about Medicare?
LAMB: Where is the crisis down the road if there is one, now that we - everything is done with digitally and…
GRANT: I think we're running of time, right? I'm running out of answers. The crisis is, yes. Well, here is the timing of the crisis. I say it happened about 35 years ago. I appear to have been somewhat early in this.
Starting in the mid '80s, Grants, my publication produced mock perspectives for the Treasury. If you are a bond issuer, you must to satisfy the SEC you must produce a document called the prospectus that lays out the facts and figures of your business, tells the risk factors.
We have done this with the Treasury off and on for 35 years. I did this because I thought the Treasury was getting out ahead of its skis. This just goes back in 1985 or '86. So, I'm the world's leading authority on when the crisis will not happen.
But if you asked one of the reasons why it would never happen I can give you plenty of those. You hear a lot of people say, in fact, you mentioned our friends the conservatives who are always invoking growth as the reason not worry about this.
Our friends at The Wall Street Journal will say, "Well, there'll be no - there'll be no crisis." The dollar is world's reserve currency. We have the strongest economy in the world, we have the fastest growth. We are an exceptional people. And we are the world's destination for talent and for capital.
And I would agree with almost all of much of that. But that is the anthem of also of an entitled people. And I'm now going to quote some facts and figures which would describe many a debtor in the world but not necessarily the world's foremost financial super power.
All right. Bank of America has recently done a ranking of 45 countries according to the size of their government budget deficit and of call it their trade deficit, right, these twin deficits.
Government internal deficit by government and the trade deficit, 45 countries. And the United States ranks ahead of Argentina but behind Brazil, Pakistan, and a couple of others. All right. So let's see. What else?
LAMB: This is the way it is now.
GRANT: Yes, the way it is now. So why is that and how do we do it? The U.S. produces much less than it consumes and has done so in trade account for many, many decades. In return for the goods that we import, net of the goods we export we export dollars. We pay for these goods with - and service with dollar bills, right?
We print these dollars or digitize them and with these dollars we service the debt. So, the way it works is this way. So, foreign countries send us stuff. We pay for it with dollars. They get the dollars and in return they oblige us by buying our Treasury IOUs.
LAMB: That's how China owns a trillion dollars and Japan owns a trillion dollars of our debt.
GRANT: Yes, yes. Or more, yes. Right. So isn't that lovely. That is a great system. Bear in mind the cost of producing these dollars is nothing whereas the cost of making things, I say, that's not insubstantial, right?
So, if you're a calamity howler as they say, some disparagingly about the debt they'll say, "Jim, will tell us again but more slowly what's wrong with this?" Right. It's a great system, right? It's a great system until our creditors decide they want no more part of it.
You know? And the United States - it's not as if we have b een doing this without cost or without a bump in the road lo 200 or whatever these years. I mean, we defaulted. We the American people defaulted on our debts in 1814, of course, the British just burned Washington.
That was an ameliorating fact. We defaulted in 1933. We refused to pay gold for dollars as promised at a certain rate. We defaulted again, promising, but not delivering to pay gold for dollars, 1971.
And I say we defaulted during the '70s by submitting to a virulent inflation that reduced the purchasing power of the dollars that we - with which you service debts, much to the disadvantage of our lenders.
So way back when, in fact, way back at the time of the French Revolution there was a wise chap. I believe he was a count of some kind and he said, "I would sooner have a mortgage on a garden than a loan to a government."
And what he meant was that governments are amoral with respect to their debts. Now, many of us individuals and many businesses are similarly amoral. But governments pay
when it's expedient.
All right, now it's expedient to pay, but will it be expedient if as in when interest rates go up, when the cost of servicing the debt, let us say imagine it's a time when it's higher than the defense budget, when it's higher than Social Security. Will it be expedient?
LAMB: So if you are saver, do you ever worry that the banks won't have enough money to recognize what is, I mean, there's a $250,000 limit that the FDIC has and all that…
GRANT: Well, I am going to say that I think that there will always be enough dollars. The question is what will those dollars buy? The United States government pulled out every stop in 2008 to make sure there were enough dollars. And I was reviewing some of this the other day.
We were writing about General Electric, excuse me, and General Electric going into the crisis was a triple A rated company. It was the greatest, had the greatest balance sheet of any industrial company extant except that it turns out that it didn't.
And it was funding itself with a most imprudently large volume of short dated loans called commercial paper which it had to roll over every 90 days or so, but it turned out that no one was willing to roll those loans over for GE during the height of the crisis.
LAMB: What did they do, did they call the loan?
GRANT: No. They called they called the government. The FDIC of all incongruous institutions was one of the federal agencies that went to the rescue of the then-Triple A rated GE. That's how extreme and how extraordinary were these interventions. And people say, well, we won't have it the next time, oh yes, it will happen the next time.
So I don't think the banks will run out of dollars to pay - the feds will certainly furnish the dollars. But you earlier recited the series of milestones if that's the name of our encumbrance, of our - a 193 years to get to one trillion, and then the next.
This year in this time of ostensibly bounding prosperity we are expected to run a deficit in excess of a trillion dollars and the tab on the gross public debt is going to be well in excess of a trillion dollar, a lot of off balance sheet stuff that doesn't get reported properly.
And what is so significant about this prospective $1 trillion increment to the gross debt this year is that it got no air-time during the midterm elections of 2018. Nobody said a word. It was the cold button issue of the election season.
And I find that - I don't find it astonishing, I find it significant. I think that we have become very complacent indeed with respect to our creditors' tolerance for what we are doing.
LAMB: What do you think of the, and you hear this periodically that members of Congress are short-term thinkers in the Senate and the House. And they will be gone by the time the problems come and that they can spend this money and not worry about it.
And we are at a period where we're - and you say it in your article where we are sending out more money than we are thinking in. I mean, what is this, is this something I think 55 percent of Americans get money from the government in some form of a check.
GRANT: I think the politicians are working on the incentives in front of them. And the people don't much care about the gross public debt. Ross Perot proved that in his own way. And I am telling you that on Wall Street it is the least interesting and negotiable piece of information you can produce for your readers or for your clients.
You cannot make a dime on the fact that the public debt this year is going to be whatever it is going to be. Isn't that amazing you will say and they say, yes. And in fairness to the doubters the government's cost of borrowing is only slightly over two percent on average.
These are not crisis level rates. In a way they are depression level rates, but they are rates that do not reflect one iota of apprehension about the credit of the United States of America.
So it will be asking something, certainly it would be asking a great deal of a politician to take a stand on an issue that is exacting so little pain, so evident little pain.
LAMB: A little bit of the time left. You have four children?
LAMB: Where did you meet your wife?
GRANT: At the Baltimore Sun.
LAMB: What was she doing there?
GRANT: Well, she was the fashion editor, because she was beautiful but because that was then, Brian, nowadays she would be identified as the professional she has since become, let's see she's got an MBA, an MD and she's a practicing neurologist and a grandmother of three, that's (Patricia Cavanaugh).
LAMB: (Patricia Cavanaugh) who practices in Brooklyn?
LAMB: And how did she make that move from fashion editor to medical doctor?
GRANT: On merit.
LAMB: I mean what was the…
GRANT: Well, OK, so she woke up one day and said, you know, I think I will become a doctor. Now in a sense she foreshadowed this by subscribing to the New England Journal of Medicine.
And I knew how seriously she took it because I was filling out in jest the blow-in card that said what is your specialty, (Patricia Cavanaugh). She was like 28. I believe that you are a neurosurgeon and the look on her face and told me that she was very serious about this.
So about 12 years, we had four kids at home and it was the most impossible idea she has ever had, but she decided to go to medical school and she began to take pre-med science courses. I vividly recall organic chemistry.
LAMB: Where did she go to med school?
GRANT: Albert Einstein School of Medicine.
LAMB: And your four kids, are any of them in your business?
GRANT: Three of the four of them are in my business and one of them is going to divinity school at Duke.
LAMB: Are they in your company?
GRANT: One is, one is an alumnus in my company, that's Charlie. He said he wanted to get a so-called real job and that was at the Wall Street Journal. What could he have meant by that?
LAMB: How many people do you have in your company?
GRANT: About seven.
LAMB: And again it's $1,300 a year if somebody wants to subscribe to Grant's Interest Rate Observer?
LAMB: Where did that name come from?
GRANT: Well, let me just put it this way, there was a, we didn't poll it.
LAMB: Did you just write it down?
GRANT: Well, the word Grant's came to me spontaneously.
LAMB: I understand that but I mean it's hard to remember.
GRANT: Of all the four names in the world you wonder, why these? Well, the Observer word is significant because it was, I observed, even that I saw even then that the future is a closed book and that while can observe how the future is being handicapped.
One cannot accept out of an extreme of conceit or of error, presume to predict it, certainly rates are difficult or impossible to predict. But we have observed and to a degree anticipated lo these 35 years.
LAMB: I want to get the date here on this Weekly Standard piece because in case somebody wants to read something that won't cost them $1,300. It's November the 5th, 2018.
GRANT: They can go to the website, we have several issues of Grant's for free, and yes, they are welcome to the website, Grant's Interest Rates Observer.
LAMB: I actually got online and there's a video of your wife talking about, because she does it a lot with Parkinson's and Alzheimer's and things like that.
GRANT: Did I mention she is an entrepreneur, she's developing a walker. She just returned from a trip to China to try to get it produced.
LAMB: If you didn't become what you are, what would you be, your other profession and would that French horn still play a role?
GRANT: No, I would be a professional scholar of Samuel Johnson. I am a Johnsonian. And I believe the best book in the language is Boswell's Life of Johnson. It certainly is the best biography and I cannot get, I go to sleep sometimes and Johnson - Boswell's Life of Johnson is on tape. It's a book on tape, it runs like 40 hours.
And it is a perfect thing to go to sleep to because it is a succession really of anecdotes and of quotations. And so, I turn this thing on.
And it's like a dog going to sleep, you know, it's like an alarm clock and he think it's his mother's heart, so I go to sleep listening to this wonderful English actor whose name I also know but don't reading Johnson, Boswell, other voices and that's what I would do. In fact it is what I am doing a little bit around 10:00 PM every evening.
LAMB: Next book for you?
GRANT: I don't know. I am watching television at the moment. I am just, my latest book is being published. I am glad you asked, it's the life of Walter Bagehot who was a Victorian figure, was an editor of The Economist and who wrote the Doctrine for Central Bankers, part of which doctrine is implemented to this day.
LAMB: When is it coming out?
GRANT: Yes, sir.
LAMB: Our guest is the entrepreneur James Grant, who has a newsletter called Grant's Interest Rate Observer. Thank you very much for joining us.
GRANT: What a pleasure.