Grantham On The Ruinous Cost Of The Fed's Manipulation Of Asset Prices

Tyler Durden's picture

Jeremy Grantham launches into his most aggressive and succinct anti-Fed diatribe yet. He is a man who gets it. 'If I were a benevolent dictator, I would strip the Fed of its obligation to worry about the economy and ask it to limit its meddling to attempting to manage inflation. Better yet, I would limit its activities to making sure that the economy had a suitable amount of liquidity to function normally. Further, I would force it to swear off manipulating asset prices through artificially low rates and asymmetric promises of help in tough times – the Greenspan/Bernanke put. It would be a better, simpler, and less dangerous world, although one much less exciting for us students of bubbles. Only by hammering away at its giant past mistakes as well as its dangerous current policy can we hope to generate enough awareness by 2014: Bernanke’s next scheduled reappointment hearing." Pretty much all familiar topics to Zero Hedge readers.

And for those pressed for time, and unable to read the full 16 page must read letter (attached), here is a bulletized form of all Grantham's key issues of contention with our zombifying chairman.

  1. Long-term data suggests that higher debt levels are not correlated with higher GDP growth rates.
  2. Therefore, lowering rates to encourage more debt is useless at the second derivative level.
  3. Lower rates, however, certainly do encourage speculation in markets and produce higher-priced and therefore less rewarding investments, which tilt markets toward the speculative end. Sustained higher prices mislead consumers and budgets alike.
  4. Our new Presidential Cycle data also shows no measurable economic benefits in Year 3, yet point to a striking market and speculative stock effect. This effect goes back to FDR, and is felt all around the world.
  5. It seems certain that the Fed is aware that low rates and moral hazard encourage higher asset prices and increased speculation, and that higher asset prices have a beneficial short-term impact on the economy, mainly through the wealth effect. It is also probable that the Fed knows that the other direct effects of monetary policy on the economy are negligible.
  6. It seems certain that the Fed uses this type of stimulus to help the recovery from even mild recessions, which might be healthier in the long-term for the economy to accept.
  7. The Fed, both now and under Greenspan, expressed no concern with the later stages of investment bubbles. This sets up a much-increased probability of bubbles forming and breaking, always dangerous events. Even as much of the rest of the world expresses concern with asset bubbles, Bernanke expresses none. (Yellen to the rescue?)
  8. The economic stimulus of higher asset prices, mild in the case of stocks and intense in the case of houses, is in any case all given back with interest as bubbles break and even overcorrect, causing intense financial and economic pain.
  9. Persistently over-stimulated asset prices seduce states, municipalities, endowments, and pension funds into assuming unrealistic return assumptions, which can and have caused financial crises as asset prices revert back to replacement cost or below.
  10. Artificially high asset prices also encourage misallocation of resources, as epitomized in the dotcom and fiber optic cable booms of 1999, and the overbuilding of houses from 2005 through 2007.
  11. Housing is much more dangerous to mess with than stocks, as houses are more broadly owned, more easily borrowed against, and seen as a more stable asset. Consequently, the wealth effect is greater.
  12. More importantly, house prices, unlike equities, have a direct effect on the economy by stimulating overbuilding. By 2007, overbuilding employed about 1 million additional, mostly lightly skilled, people, not counting the associated stimulus from housing related purchases.
  13. This increment of employment probably masked a structural increase in unemployment between 2002 and 2007, which was likely caused by global trade developments. With the housing bust, construction fell below normal and revealed this large increment in structural unemployment. Since these particular jobs may not come back, even in 10 years, this problem may call for retraining or special incentives.
  14. Housing busts also help to partly freeze the movement of labor; people are reluctant to move if they have negative house equity. The lesson here is: Do not mess with housing!
  15. Lower rates always transfer wealth from retirees (debt owners) to corporations (debt for expansion, theoretically) and the financial industry. This time, there are more retirees and the pain is greater, and corporations are notably avoiding capital spending and, therefore, the benefits are reduced. It is likely that there is no net benefit to artificially low rates.
  16. Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy. Importantly, by increasing inflation fears, this easing has sent the dollar down and commodity prices up.
  17. Weakening the dollar and being seen as certain to do that increases the chances of currency friction, which could spiral out of control.
  18. In almost every respect, adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.

Read the below letter (pdf link) in conjunction with the just released letter from Sprott on how to counteract the Fed's pervasive destruction.


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Cognitive Dissonance's picture

Only by hammering away at its giant past mistakes as well as its dangerous current policy can we hope to generate enough awareness by 2014: Bernanke’s next scheduled reappointment hearing."

Please don't fall for the trick of focusing on when Bernanke is up for re-appointment because that still leaves the Federal Reserve beast alive. Bernanke would just be replaced with another puppet. Bernanke and the rest of the world (wish to) believe that Baby Ben is in charge. He's not. The agenda is controlled elsewhere. He just has the illusion of control so we peons won't look under any other rocks to see what crawls out.

Bernanke (or any other figure head for that matter) doesn't make the Fed dangerous. The Fed is dangerous. Period! End the Fed. End of story.

MeTarzanUjane's picture

Well yes that's a nice thought repeatedly put out there on this channel but it's not in the cards. Most people in this country think the Fed is a branch of .gov.

For once can we get some sound thoughts on; working with, rather than fighting against.

Ps. I like the graphic, very Halloweenish.

Clycntct's picture

How long did it take to get that silly idea the earth was round out there?

"For once can we get some sound thoughts on; working with, rather than fighting against." Said the engine to the handful of sand.

Pound it till it's known.

Lucius Cornelius Sulla's picture

Andrew Jackson understood it for what it was and did something about it.  It can be done again.

Cursive's picture

Damn right.  And I ain't waiting til 2014.

Bartanist's picture

Nice words. However, what do you suggest? The Fed has been around and causing mischief and misery for the past 97 years. It has too much unchecked power. It IS taxation without representation. There is no way to control it. It IS the monarchy or at least how the monarchy manages the US.

The Fed does not listen to anyone because it does not have to. It is above the law. It is "them". Getting rid of it and making money creation and control part of "us" is the only solution.

Cecil Rhodes's picture

taxation with representation ain't so hot either

The Rock's picture

I agree.  None of this "limit them" to this or that.  The beast of the Central Bank (the Frauderal Reserve) must be slayed completely.  The whole premise of their existence is to rape the system.  Why should we ask them to print our money and pay them back with INTEREST!!  What kind of horse shit is that?  40% of all federal income tax receipts goes toward paying these fuckers just the interest on the printed "money"!!  This is USURY folks, plain and simple.  Add on top of that "fractional reserve banking" on toilet paper (fiat) money.  PERPETUAL USURY ON ABSOLUTELY NOTHING!!!!!

masterinchancery's picture

Yes, it is unrealistic to expect any Fed "promises" to be kept. The only solution is a stake through the heart, preferably accompanied by a silver bullet in the head; otherwise Dracula the bank will be back sucking our blood in no time.

Bob's picture

It's pure insanity.  A license to enslave a nation. 

Revolution_starts_now's picture


Fold them like a lawn chair.

Rasna's picture

Amen, CD... Amen

The Fed needs to be abolished


the rookie cynic's picture

Yes. The Fed's "mandate" has become nothing more than a smokescreen to hide what the PTB have been up to: trading stable, sane, organic commerce for low-interest rate, bubble economics that effectively steal from every possible profit producing segment of the world's economy. The Fed needs a more appropriate slogan: Rob from the middle-class and give to the rich. The Fed, and the powers it serves, is giant sucking parasite that will only stop when it runs out of other people's money.

Cognitive Dissonance's picture

The Fed is just another component, albeit a very powerful component, of a social control system designed to maintain the illusion that we are happy (wage) slaves that have never seen better times than we have over the past few decades.

My iPhone is proof that life is good.

Revolution_starts_now's picture

The fed is the head of the snake, it the source of power and financial backing to enslave the Masses. All other things are a symptom, ending the fed will solve the problem. It will give the people 100 year head start at true freedom. It will be up to them to run for it.

zaknick's picture

ZH is showing up in the MSM.... hmmm.

vega74's picture

'The agenda is controlled elsewhere.'

Could you elaborate more on that comment?

Dismal Scientist's picture

I don't think CD will elaborate, he has stated before in previous posts that even the ZHers are not ready for the final truth...

Or did I misunderstand your comments re 5th level of control, CD ? Am merely curious.

Cognitive Dissonance's picture

It is my opinion that to continue to focus on who, what, when, where and why regarding the controllers hugely distracts us from the business of becoming emotionally, psychologically and spiritually free. As long as we are distracted by the magician's waving hands and gorgeous assistant, we won't even begin to understand why we willingly submit to the controllers in the first place.

Regarding your specific question about the 5th level of control, what benefit would be derived from trying to explain the 5th level when so many people don't believe there's a 3rd or 4th? Ultimately we are in control. Or we are not in control. No one wrestles power from the individual, the individual willingly surrenders his/her power in exchange for the freedom of the responsibility to properly use, and most importantly not abuse, his or her own power.

Everyone wants someone to do something about this insanity, but no one wants to be responsible for doing something about this insanity. How can we say we are free when we won't even accept responsibility for freeing ourselves? Once we gain the knowledge, wisdom and courage to no longer surrender our power, everything will change. Which means that in order to balance the equation, nothing will really change as long as we continue to surrender our power.

traderjoe's picture

RE: the gorgeous assistant - have you seen the Anna Chapman Maxim Russia pictures? I'd surrender to that power... ;)

p.s. As usual - well said. Oh, and did you see the comment on disorganized resistance the other day?

bingocat's picture

Everyone wants someone to do something about this insanity, but no one wants to be responsible for doing something about this insanity. How can we say we are free when we won't even accept responsibility for freeing ourselves? Once we gain the knowledge, wisdom and courage to no longer surrender our power, everything will change. Which means that in order to balance the equation, nothing will really change as long as we continue to surrender our power.

Well said. But it is important to note that absolute freedom creates problems which people don't want to deal with.

Everyone has to surrender some power in order to get to a middle ground that everyone can accept. As far as I know, there is no precedent anywhere in human history for a society (call it larger than a few hundred people) where people act as independent agents in a peaceful way without surrendering some authority to a 'governing' power. Indian tribes, New Guinean clans, even communal cultures like the Yanomami have a chief. Small villages in the Himalayas have religion. Even marauding gangs have a leader. Every society in history has 'agreed' explicitly or implicitly, to an organizing force. Democracy is supposed to provide a mechanism for 'refreshing' the mandate to lead. Aggressive enough lobbying can cause structural change to the implementation of the organization but still leave the democratic infrastructure in place.

What I am waiting to hear, from anyone who advocates abolishing the Fed because of its inherent flaws, is what the residual should look like, with or without organizational features. It would be refreshing.

It is fine to say "throw the bums out" without finding a replacement, but then you get people like Sarah Palin and Christine O'Donnell to fill the void of discontent (and I don't critique their politics for the purposes of this comment, just their habit of lying to the public).

Lucius Cornelius Sulla's picture

U.S. Constitution - Article 1 Section 8

To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;

traderjoe's picture

A US Treasury issued currency - issued without debt, like a Lincoln Greenback. Paired with a functioning PM-linked (private or public) currency to introduce competition and make inflation more readily apparent. Link the US Treasury dollar issuance to population growth, or some other hard number and have a mandate for price stability (or even a bit of deflation) so that citizens can store their value/wealth over time - without the need for the parasitic 'money-changing' industry. Just a quick brush...

Cursive's picture


Well put.  Hat tip to you, sir.

bingocat's picture

It's a simple idea. Lots of people like simplicity because it means they don't have to think. How does one get from here to there? How do people who are against the economic decisions by fiat of government BECAUSE they are fiat reasonably convince others that the process of getting from here to there is not simply a different version of the same fiat mentality? But let's chase this down anyway...

Issue the new currency into escrow, and then virtually tax all asset holdings and the PV of future employment income to get to a zero debt situation. Then apply an actual tax and net out the difference between what you will deliver and tax. But wait a minute, the net financial assets of 50% of the population are almost zero, which means any tax on PV of future income is effectively putting them deeper into debt. If we make an even more progressive tax, the entire re-jiggering of the system will be financed by a one-time shock tax to the rich (whose assets are more likely to be mobile anyway). The question is who would want to suffer the shock to the system that would entail, and who gets to decide that everyone should suffer that shock? But let's just say that you do and you can decide for all of us...

Fine. Now run the government on a zero deficit basis, with only a very small, and tightly regulated, revenue vs spend buffer, and watch what happens...

Assuming other countries don't do the same, one is subject to forex fluctuations which would make managing a company which had to sell US-costed products and services abroad difficult. And would certainly introduce greater price volatility of foreign-sourced products. Anything which reduced trade flow would reduce income and GDP vs now. Productivity growth (the other driver of real GDP growth) would fall based on inherently higher costs of buffering that volatility.

The 'problem' of trying to introduce structural shocks to capitalist money-flow schemes is that it introduces tyranny of government. SOMEONE decides what is good for everybody. A sudden large tax of those with assets, accompanied by lack of growth AND inability of the government to provide a safety net effectively means the end of incentive to work in the United States.

I think VERY few people would be happy with the result. If anyone had more money or more income than anyone else afterward, those on the lower half would think it was unfair. Anyone on the upper side would think almost any version of this is unfair. Every other country in the world would try to import the wealthy people so that the wealthy could keep their assets abroad and those countries would suddenly gain experienced capitalists with their assets. If you tax everyone down to their skivvies and then grant everyone a cash pile and a stipend, then everyone is equal. But housing and personal non-financial assets would have to be reallocated by lottery too.

I may be unhappy with the state of things, but that is not something I would wish on American society. It would likely be the end of democracy as we know it (democracy does not work well with social policy which allows for egregious economic fiat).

Simple is good. But life is not simple.

The easier way to get this done is by simply introducing a safety net (like universal health care, education), raising taxes on the wealthy (which is happening), and keep government worker count to a minimum (the nice thing about universal safety net systems is that once in place, they are easy to keep track of (they are data-based, not subjective judgment-based)).

How do you do this? Well... count the voters who would benefit vs the voters who would suffer from such a scheme. This should pass with flying colors if it is widely desired, but the fact that it hasn't is because it is not widely desired, and your fiat is not much different than anyone else's.


traderjoe's picture

You raise all of the right issues. And the implications of which are: (1) there are infinite solutions which would/will be offered for the next paradigm, thereby vastly complicating its introduction; and therefore (2) the present situation becomes a more powerful anchor, even though it is fundamentally flawed. Better to have the devil you know...most would say. It most certainly is a sticky wicket. And some would say (like Sean7k), with good cause, that ANY central government (and thereby fiat) is inevitable corruptible.

Just to trip down further <my> rabbit-hole - I'd have a complete debt jubilee for individuals, introduce some reforms to the nature of corporations (they provide too much liability protection for individuals), impose a high import duty, bring most/all of the troops home, close the bases overseas, maintain only a small military R/D process (the possibility of a full-scale non-nuclear ground war seems so unlikely), develop energy independence, provide only public financing for electoral races, eliminate gerrymandering, eliminate public sector unions, implement basic universal safety nets with definable limits, cancel the current currency overnight and implement the new one the next day (remember debt jubilee), eliminate the IRS (and the present tax code), have either a national sales tax, or a simple one line corporate and individual tax return, etc. If you could demonstrate how most would be more free, you might have a shot at waking the masses (but not pandering to them either)...

But implementing all of those ideas - my ideas - would be fascist on my part. I would be determining the <better> path for the country. Gathering a national consensus on the 'right' path, in the midst of a then-current power-vacuum, now that's a problem...

It's all a sticky wicket... 

bingocat's picture

Thanks. Some nice concepts in traderjoetopia there but the shock to the system is antithetical to the anti-fiat philosophy. I personally disagree that 'most would be more free.' I have never seen any economic systemic shock which did not result in corrupted government, whether backward (like Zimbabwe, or Venezuela), or 'forward' (like the former SSRs).

As you say, a sticky wicket... wot?

traderjoe's picture

Not sure if you will be back, so I'll be brief:

1. "wot" - is that a specific abbreviation?

2. I'm not anti-fiat, per se. I would prefer a US Treasury issued currency - issued without debt and interest. Allowing private banks to create the currency is an abomination - see the famous Jefferson quote. And to provide a check on this, have a competing asset-backed currency. I believe the monopoly of a currency is also an abomination. Competition allows the people to choose, i.e. freedom. If the goobermint squanders the trust in the fiat, there is a ready alternative for the people. 

3. Many of my thoughts would be a relative dismantling of the current government structures, favoring local control and participation. Hard to express in this forum, but the nature of the economic shock might be relevant to what happens on the other side...

4. Along those lines, I usually don't actually propose solutions, but merely focus on the failings of the current. As I referenced, I think discussing the future is a bit premature, and even sets back the desire to move off the current paradigm (as the eventual solutions bog down progress). It may seem a bit 'whiny' to discuss the problems with the current situation, but I'm trying to ferment discord/disgust first... :)


bingocat's picture
  1. 'wot' is the British English spelling of adding "what" to the end of a comment asking for implied acceptance of what the speaker has just said. Kind of like the 'znit' at the end of 'it's the shiznit.' Google "sticky+wicket+wot" for more.
  2. I think it's tough to be BOTH anti-private currency AND for a non-monopoly on currency.
  3. Agreed as to reflexivity of shock and what comes out the other side, but I'd wager human nature prevails before we get to universal harmony forever.
  4. Understand. Personally, I think the best way to prompt a nice result is to engage people to think about the solution. If they just think about the dissatisfaction, it means a cathartic, but very ugly, end. In the end, you have to get everyone to the same place, not just to a different place than now.
goldmiddelfinger's picture

All economic intervention is a means to a POLITICAL end.

traderjoe's picture

Didn't they used to call it Political Economy (as opposed to economics?)?

@Bingo - I'm opposed to private monopoly fiat currencies. It's the worst of all worlds. I'd love a competing private PM-backed alternative currency. Pretty hard to manipulate those...

goldmiddelfinger's picture

How tiny tiny tiny can the mind  become in this post of unusual narrowness?

Dismal Scientist's picture

'Regarding your specific question about the 5th level of control, what benefit would be derived from trying to explain the 5th level when so many people don't believe there's a 3rd or 4th'

Thanks, I'm with you on the 3rd and 4th levels. Hence my interest in the 5th. It would benefit me to hear your thoughts, as you can see I read your previous comments and took them seriously ?

mogul rider's picture

CD well said, the average joe is not average at all. He is a slave and is unwilling to accept his freedom because he believes in structure and order. Wihout structure and order he is lost.

So the trade off for Joe is the relinquishing of freedom for hte belief that he will have a safe, structured happy life. That is the true promise of democracy

And it's gretest curse becuase it lets the "matrix" complete control. Control of finance, real politique, armed forces, police, etc.

The fascist corporatist state in return promises the "batteries" a home, kids, a boat, a car, and a hot Bitchez wife.


The trade off can be discussed ad nauseum, but, the Joe likes his place.


rocker's picture

If you have to ask, you will never understand it.  You may even defend it with denial. 

greyghost's picture

correct...he states all he wants is to ensure there is enough liquidity. don't need no stinking federal reserve for that. that is the job of the u.s. treasury dept...ensure there is enough monies to ensure the conduct of business and the american people. again, the treasury could spend how much money into circulation by making soc. sec and medicare payments alone. CREATE THAT MONEY WITHOUT INTEREST AND DIRECT TO THE RETIREES.  with this alone you could do at least two things....continue to collect soc.sec. and medicare taxes from paychecks and use that to pay down national debt -or- stop collecting those taxes and give the monies to the american people to spend and boost the economy, that would be what "laffer" would do....using the boost in payrolls to pay down the debt. of course you would have to have that computor program to regulate the money in circulation.

Coldfire's picture

And the unconstitutional government that protects the Fed is equally dangerous. Taking the republic back must involve slaying that dragon, as well.

RockyRacoon's picture

The Fed already knows all this stuff.  What now?

NOTW777's picture

abolish the fed and hire Neil B to close it down in an orderly fashion.

Cdad's picture

I believe you will get your wish.  I believe it will happen in the not too distant future.

Ben Bernanke's actions over the last two years have sealed the fate of the Federal Reserve Bank.  The systemic fraud within the banking industry will not go unpunished.

Lucius Cornelius Sulla's picture


I agree.  The crisis has drawn a lot of attention to the fraud that has been carried out.  People are not only waking up, they are they should be.

bingocat's picture

I think if housing prices had only risen 5% in the 10yrs to 2007, and GDP growth had been a lot lower over the period, and then housing prices had broadly fallen 10%, with the Fed subsequently lowering interest rates to close to zero, the broad level of unhappiness with the Fed would be different.

Bubbles are not ONLY caused by the Fed. By definition, one gets a lot of people chasing them and its those who buy last who suffer, but democracy says, those people are never wrong.

It is ALWAYS someone else's fault.


Waterfallsparkles's picture

The FED appears to be trying to Manipulate the Election Results by Printing Money.

How many Billions of Tax Payer Money have they printed to influence the Election?

NOTW777's picture

"Our new Presidential Cycle data also shows no measurable economic benefits in Year 3, yet point to a striking market and speculative stock effect. This effect goes back to FDR, and is felt all around the world."

and yet, libs will argue the "market" does better under dems

Something Wicked This Way Comes's picture

When do we start sharpening the guillotines? Can I haz Ben?

zaknick's picture

I think he's not a very high up scumbag in the grand scheme of things. I think they're actually the hired help.

MeTarzanUjane's picture

Very well put. Remember the deck of cards handed out to troops in Iraq/Afghanistan with the most wanted printed on it?

Time for a new addition to the ZH swag store.

zaknick's picture

Actually, I'm hoping for a system of government which will persecute and prosecute (lots o' death penalties!) rogue wealthy fascists. The same ones who ruined America and lots of other countries with their unseemly greed passed off to Americans as legitimate national security.