Q&A With Jim Grant: Look For "QE 3 Through QE N"

Tyler Durden's picture

By now it has been made very clear that Jim Grant is firmly in the (correct, at least according to us) camp that no matter what, the Fed will be forced to proceed with at least one more (and likely many) round of quantitative easing. In his latest must read interview, the author of Grant's Interest Rate Observer further explains, in simple terms, not only why the Fed is boxed in when it comes to monetary policy (an assessment comparable to that by Marc Faber back in March: "We may drop 10 to 15 percent. Then QE 2 will come, (then) QE 4, QE 5,
QE 6, QE 7—whatever you want. The money printer will continue to print,
that I'm sure. Actually I made a mistake. I meant to
say QE 18
."),  but also refutes the fallacy of counterfactual statements that the world would end if the Fed had not intervened to prevent a systemic collapse in 2008, why a gold standard in our lifetimes is coming, on whether he is buying gold currently, on inflation, on corporate valuation, and where (and more importantly when) investors should be putting money to work.

From AP:

A graduate of Indiana University, Grant, 64, was a Navy gunner's mate
before starting his journalism career at the Baltimore Sun in 1972. He
then joined the financial weekly Barron's before starting Grant's
Interest Rate Observer in 1983. He's also written seven books, mostly
financial histories and profiles. His first book was on Bernard Baruch,
the pre-WWI financier and advisor to presidents. His latest is a profile
of Thomas Reed, an acerbic and witty Speaker of House over 100 years

As stocks were falling last week, Grant visited The
Associated Press in New York to talk about why it's not just stock
investors who should be worried. Below are excerpts, edited for
clarity, from a wide-ranging conversation in which he lit into the
Federal Reserve for our current troubles, warned of 10 percent inflation
and waxed nostalgic for a time when Washington had the courage to let
prices fall in crises rather than goose them up and prolong our agony.

Q: What's your view of the stock market?

The Federal Reserve has unilaterally taken it upon itself to levitate
asset prices. It is suppressing interest rates. When you're not getting
anything on your savings, you are inclined to go out and buy something,
anything, to generate either income or the expectation of capital gains.
So the things that we take as prices freely determined are in fact

A few months ago, (Fed Chairman) Ben S. Bernanke,
Ph.D., the former chairman of the Princeton economics department, stood
before the cameras of CNBC and said that the Russell 2000 is making new
highs. The Russell! He sounded like another stock jockey. He was
taking credit for new highs in the small cap equities index. The Fed, as
never before, or rarely before, is now the steward of this bull market.
One wonders what it will do if stocks pull back significantly.

Q: Are stocks overvalued?

Some big multinationals left behind in the past ten years (like)
Wal-Mart, Cisco Systems, Johnson & Johnson appear to be attractively
priced. But generally speaking, things are rich.

Q: What would you have done in the financial crisis if you had been in Bernanke's position?

Resign. I don't know. I have great faith in the price mechanism, in
the mechanics of markets. I think there should have been much less
intervention and we should have let some chips fall, many chips fall.

the Great Depression, there was a great depression (lower case `g') in
1920-21. Within 18 months, the GDP was down double digits and commodity
prices collapsed. Harry Truman lost his haberdashery in Kansas City.
It was very painful, but it ended. And the Fed, during that depression,
actually raised its discount rate and the Treasury ran a surplus. The
reason it ended was the so-called real balance effect -- that is, prices
came down and people with savings saw things that were cheap and they
invested. That's the fast and ugly approach.

The slow and ugly
approach is to mitigate, temporize and forestall to give us time to work
ourselves out of difficulties. That's the current approach. I think
it's intended to be a more humane approach, but I wonder about its
humanity. I mean these college kids get out of school and they've got
nothing. It's awful -- 9 percent unemployment and going nowhere except

Q: But Bernanke has succeeded by some measures. Big
companies are flush with cash, their profits are on track to hit a
record this year and the riskiest among them are raising money at the
lowest rates ever. Who could have imagined this during the depths of
the financial crisis?

A: Let's go back to the previous cycle of
2002-3. Cisco Systems was for 15 minutes the costliest company on the
face of the earth, and digital technology was about to raise every human
being out of poverty. OK, so that cycle ends -- Bang! -- with general
disarray in the stock market. What do we do? Well, we press down
interest rates and we give residential real estate a little helping
hand. What's not to like? Home ownership rates are rising. Stocks are
up. Risky companies are issuing debt at levels never before imagined.

would have dreamt such an outcome was possible after the tech bust? And
that ended noisily and here we are again and our monetary masters have
devised new, even more audacious methods of stimulus. In three or four
years we'll look back and say, `Can you believe we fell for this again?'

Q: You've been warning about higher inflation for a while. How imminent is it?

I've been all wrong on this. I thought that this massive monetary stuff
would generate the conventional kind of inflation that would be
expressed in much higher CPI readings. Not so far. But all things are
cyclical and the seemingly impossible is just around the corner. On
September 30, 1981, the 30-year US Treasury bond traded at 14 7/8
percent and I remember some crank, some visionary, was talking about how
interest rates were going to zero, you watch. Oh, yeah right. And so it
came to pass.

It does seem improbable that the inflation rate
would ever get beyond 3.5 percent, let alone knock on the door of 10
percent. But I'm here to tell you it's going to 10 percent.

Q: Won't policymakers come down hard if we get even 6 percent inflation and try to lower that?

Sometimes they can't control things. We had 6 percent inflation
before. Washington is full of well-intentioned people. Ben Bernanke
keeps saying that what we really need is a little inflation. He says
we'll get 2 percent or a little bit more. You shouldn't even think
that, let alone say it out loud. That's such bad luck to tempt fate by
saying that you can calibrate things like that. You can't do that.

Q: So with inflation ahead, are you buying gold at $1,480 an ounce?

I am not buying it now. I have bought it in the past. Gold is a very
difficult investment because its value is indeterminate. It is the
reciprocal of the world's confidence in the likes of Ben Bernanke. I
think the price will go higher.

Q: When did you first buy gold?

Well, my first misadventure with gold was standing in a queue in front
of the Nicholas Deak currency and coin shop, which was on lower
Broadway. And it might have been January of 1980 at the very peak but if
not then, it was late 1979. I almost top ticked it. That was before I
learned never to stand in line to buy an asset. You always want to go
where nobody else is in line.

Q: Let's talk about the dollar. Washington says it wants a strong dollar.

It's disingenuous when (Treasury Secretary) Tim Geithner says he's for a
strong dollar. What he means to say is the economy stinks and we need
even greater oomph from our exports and for that we would like a much
lower dollar in a measured, managed kind of decline. That's what he
wants, and he wants it by November 2012.

Q: What's wrong with a
weak dollar? Caterpillar recently said it is nearly doubling its capital
spending because the weak dollar allows it to sell more overseas. It
plans to spend much of that on factories in the U.S., paying
construction workers to build them and hiring people to work in them.

Well, that is the Caterpillar story. The whole manufacturing story in
the U.S. is very sunny, and it's in part due to the state of the dollar.
But if (prosperity) were as easy as debasing one's currency, think of
all the countries that would be prosperous that are rather the opposite.
Argentina would be booming. And Weimar Germany would not be a story of
failure but of success.

If the world were to lose confidence in
(the dollar) we would suddenly be in a much less advantageous financial
position. The U.S. is uniquely privileged in that we alone may pay our
bills in the currency that only we may lawfully print. That's our
prerogative as the reserve-currency country. But it has seduced us into a
state of complacency. We never actually pay the rate of interest that
we might be expected to pay -- the real rate of interest -- on Treasury

It's great for now that we're paying 2.5 percent or
whatever on our public debt. But wouldn't it be better if there were an
accurate price signal that was telling us that we're borrowing too much?

Q: If investors lose their faith in the dollar, what would replace it?

I think there will be a gold standard again in your lifetime, if not
mine. It's the only answer to the question, if not the dollar, then

Q: Where should people put their money now?

A: The
trouble with the present is that nothing is actually cheap. My big
thought is that our crises are becoming ever closer in time. The
recovery time from the Great Depression was 25 years. The stock market
peaked in 1929. It got back there in 1954. We had a peak in 2000, crash,
levitation, then the biggest debt crisis in anybody's memory. The
cycles are becoming compressed. The temptation to become invested at
peaks of these shorter cycles is ever greater.

Perhaps one way to
proceed is to hold cash at the opportunity cost of not much in Treasury
bills. You make nothing, but you want to have this money when things are
absolutely, not just relatively, cheap. This time of full or
overvaluation shall pass. On recent form, it'll pass in a thunderclap
and there will be a panic and it'll seem as if the world's ending. And
that's when somebody who is nimble can get fully invested in a
comfortable way.

It won't feel comfortable, it will feel awful,
but I think that's the way to do it. I mean everything (you could invest
in) is either uninteresting or rich, it seems to me.

Q: What about Treasury bonds?

I think it's useful to imagine how things might look ten years hence.
What will one's children, heirs or successors think about a purchase
today of ten-year Treasurys at 3.25 percent? They'll look back and say,
`What were they thinking?' The (federal deficit) was running at 10
percent of GDP, the Fed had pressed its interest rates to zero, it had
tripled the size of its balance sheet, and they bought bonds? Treasurys
are hugely uninteresting, as is similar government debt the world over.

Q: Any last thoughts?

Because the Fed has coaxed or cajoled people into stocks, including
many financial non-professionals, I think it has moral ownership of the
market in a way that no recent Fed has had. Either the stock market owns
the Fed, or vice versa but they are too intertwined now. If stocks pull
back by 20 percent, how can Bernanke just sit there and say, `I want a
bear market?' I think he has some moral responsibility for the
finances of the non-professionals who bought.

Q: Does this mean the Fed might announce QE 3, a third round of quantitative easing to lower rates and raise stock prices?

A: Yeah, it means QE 3 through QE N.

h/t nobull1994

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falak pema's picture

QE-3 is like Fukushima with three reactors down...good luck..

spiral_eyes's picture

qe infinity is a house of cards. inflating the economy to catch up with crashing equity and real estate prices, and living off borrowed prosperity from china, mena, & the productive world will work out fine, until it doesn't. and then it will sink into the ground like a rock. trust in the treasury ponzi is eroding, as the tidal wave of laziness, stupidity and compound interest crashes down. 

IdioTsincracY's picture

That is bad ... however in the past, wages heve kept up  at least partially ...

now we have big inflation, but wages and benefits are going down (fast!), and unemployment is rampant ...\


cranky-old-geezer's picture

... inflating the economy to catch up with crashing equity and real estate prices ...

... inflating STOCKS while the rest of the economy crashes ...

There, fixed it.

... and living off borrowed prosperity from china ...

... and living off PRINTED MONEY from THE FED ...

Fixed that one too.

max2205's picture

Oops Mish hates us.... :(

Popo's picture

Nah.  He just called bullshit on Ilene's conspiracy theory crap re: DSK.   

No one with a clue would deny that ZH has been *the* blog for financial news over the past couple years.   I think Mish (and many others including myself) have begun to notice a slide in standards by some of the newer writers that ZH has given posting rights to.

I for one am growing increasingly tired of reading lightweight fluff, half of which is an ad for some newsletter subscription.   Why Tyler gives these people with nothing to say (I'm looking at you Phoenix Capital Research) posting rights is beyond me.

But I still read ZH about 10 times a day.   :)

...and it's still the blog I turn to first.

Dejean Splicer's picture

Everything that that silly bish writes about is 3 day old rehashed ZH articles. (Ilene). Philz stock crap is not a for profit business? Tyler should line them all up (including Creggie Milton), make them dig a deep hole somewhere in the woods and one-by-one shoot them in the in the back of the head. All of them! Except for GW.

DK Delta's picture

Mish is a great complement to ZH

duncecap rack's picture

I like reading Mish but the article he took exception to was quite good I thought. The reasons for the harsh treatment of DSK  were quite reasonably argued. I bet the article makes it to thingsthat make you go hmmm and Jesses cafe americain. I will be interested to see if it is tn those places.

Atomizer's picture

I'm truly happy that you read Mish too. When flipping a coin & guessing, sometimes it's easier to read the odds.

Rigging French Elections: The “DEATH BY MEDIA” of Dominique Strauss Kahn

I don't endorse this site, just pull needed info to see the next stage of events.

max2205's picture

IMO JG has drank some kool aid if he thinks Ben controls the market (longterm). I was astounded when he said Ben owes those who bought in some consideration. Flabbergasted

Al Gorerhythm's picture

QE-3 is like Fukushima with three reactors down...good luck..

So true, it won't be reported on either. I'm guessing all's good, gauging by the silence in the press. 

Tail Dogging The Wag's picture

Like Jim Rickards, I call it Perpetual QE and this is why you should keep on reading...


In times of change you need new alternatives and new ideas.

Land in Panama is one of the most undervalued assets in 2011.



In the event of a sale of land from any of the Thorsson Capital properties to any Zero Hedge reader, the vendor (Thorsson Capital) hereby pledges a donation of 1% of the total sale to Zero Hedge, said donation is to be made within 30 working days of settlement.


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Nevermind's picture

Phi Beta Kappa from Harvard. Princeton Professor. The man who knows more about Central Banking than any other person on earth. He saved the world. Bernanke cannot be wrong. Just ask him. 

spiral_eyes's picture

the underlying fundamentals of the american economy are so bad, bernanke has little choice but do what he's doing and fucking pray. the other choice would have been to take the pain in 2008, let the banks fail and the ponzi fall. but bernanke likes his office, dc likes hookers, rent boys and cocaine, the imf, and reits. they're doing all they can to hyperextend their party.


zoellick and his faction will be left to pick up the pieces, re-institute the gold standard, and get america manufacturing again. now if only they would let ron paul be president... but they won't go that far.

plocequ1's picture

The fed will print money. I knew that and im a fucking idiot. This phony pro and con bullshit is all fucking theatrics. QE will continue. 

Mountainview's picture

And the Dollar will find it's intrinsic value...the value of paper...

Tunga's picture

If it didn't grow on trees it would only cost $5 to dig it out of the ground. 

akak's picture

And the shit is fucking everywhere!

Alcoholic Native American's picture

We need more generous anonymous billionaires buying treasuries.  We can't count on Ben and his shareholder buddies to keep funding us forever.

Tense INDIAN's picture

and that means get as much SILVER as possible after this Bear market for silver is over...


and gold too..

Sudden Debt's picture

When the dollar and the euro will go down to dust, gold and silver will be all that remains.

Any new currency that will be created in the aftermath will not be trusted for years even decades to come.

And to meet the need of money worldwide, that's a lot of gold and silver that will be needed. A lot more than exists today. If the dollar and the euro where to go down, gold and silver will be worth 100 times a much as they do today.


Dapper Dan's picture
Gold, silver coins now to be legal currency in Utah By JOSH LOFTIN
© 2011 The Associated Press May 22, 2011, 2:59PM

Read more: http://www.chron.com/disp/story.mpl/ap/nation/7576264.html#ixzz1N79DRXpI

Dejean Splicer's picture

"Craig Franco hopes to cash in on it with his Utah Gold and Silver Depository, and he thinks others will soon follow.

The idea is simple: Store your gold and silver coins in a vault, and Franco issues a debit-like card to make purchases backed by your holdings."

Let me hold your gold and silver, yea right. Mmmmk.

aerial view's picture

agree with you Jim about more QE. What other choice do they have that will not crash the economy? With the reserve currency, worldwide military bases and control of much of the world's oil, they can do what they want even though they clearly know that the middle classes' standard of living will continually decline-but hey, an imperialistic govt is here to serve the rich while enslaving everyone else.

TorchFire's picture

The physical fruits of the world are but vehicles for the elite. Constantly on the prowl for their favorite prey to inflate, the tsunami of fiat will flow from TPTB to inflate any victim (tangible matter) they believe can contain the evidence of their crimes for a season.  Stash the paper anywhere and everywhere to justify "growth" at all costs....otherwise the shackled audience of blood dolls will feel the cold steel on their ankles and come to realize the constraints are but a mist.


TorchFire's picture

Want poetry?


Alas we have come to this

as we peer into the abyss

carved with 10 trillion tears

poured forth for 98 years


For behold they did beguile

with their scheming on Jekyll Isle

and with greed they did collude

to establish our servitude


With malevolent power dispensed

their tyranny fully commenced

and evil their heirs refined

have made the people blind


But look deep in the pit and see

there are legions who WILL breathe free

and Liberty will raise a sharp edge

with the sword of Zerohedge


(10 mins of reflection. I could go on and on....)

JR's picture

Really good!! “with the sword of Zerohedge...” And “nobody can deny…and so say all of us.”

TorchFire, ZH’s poet laureate.

JR's picture

“What is the matter, my friend?" Dionysius asked. “You seem to have lost your appetite.”

“That sword! That sword!” whispered Damocles. “Don’t you see it?” …

TorchFire's picture

+1 Nice touch with the Damocles reference!

tired1's picture

The Razor Edge of ZeroHedge - An Epic of Tyler's Mission

Dejean Splicer's picture

"otherwise the shackled audience of blood dolls will feel the cold steel on their ankles and come to realize the constraints are but a mist."

Brovo! More please.

??'s picture


Q: So with inflation ahead, are you buying gold at $1,480 an ounce?

A: I am not buying it now.


Q: Where should people put their money now?

A: ...Perhaps one way to proceed is to hold cash

Arius's picture

no comment ??


NewThor's picture

From an investing perspective, I believe he's right about not buying gold

gold now and being in cash.

It's my belief that with the gap in between QE2 and QE3 everything

will correct down 20-30%.  All stocks and commodities. 

So it'd be much safer now to be in cash, and buy silver over gold.

Yes, Gold is still a brilliant investment as long as the Federal Reserve

is around, but me thinks that you'll be able to pick it up for about

$1100 to $1200 an ounce in the summer.


Landrew's picture

I don't think I agree. In the recent past two years, the very moment there is any downward movement in equities or commodities the fed introduces the QE trial balloon! At that all assets soar, is that not true? Rates rise the fed buys bonds and MBS. If your talking about what is happening now with small movements of lower equities, I play that move with short term puts on selected high momentum Dow companies. I have bought INTC June 23 puts when INTC moves over 23.50 then sell at 23.25 for a nice dime of return. I see no way to position yourself  without excess risk. Buying a blanket naked puts on high momentum Dow seems as risky with a threat of QE announcement  always a Fri. after market event possible.

tired1's picture

How about ridding oneself of FRN's moving into a more stable currency?

Saxxon's picture

Agreed New Thor and the guy ahead of you.

I don't have a guess for the price of gold at the nadir of the coming correction; but it is too high now.  Much moreso silver, which I believe will go well sub-$30 per ounce.

Folks, gasoline in California barely 'corrected' to $3.99 in my parts.  $4 ++ gas is slowly grinding the man on the street and our masters know it.  The video-game Osama kill excited the unwashed mass but the present administration needs better than that to lock in 2012.

So, stand by.  My spec positions are bullion and cash and I will need persuading to buy anything other than a leveraged neg ETF.

tip e. canoe's picture

avg gas price off the LIE this weekend: $4.59.   that's for the cheap stuff.

DK Delta's picture

thank god somebody saw that

Bazooka's picture

FED will have an "uncle point"....the point at which it's self preservation will prevent furhter QEs.

Public backlashes are already coming out; e.g. ChairSatan, William Banzai images, etc

Political backlashes are increasing against the Fed...Ron Paul and others.

More importantly, the FED is not greater than the market! It does not control the market...it follows it. Once the downdraft comes and we surpass the March 2009 lows, the contempt against the FED will become feverpitch.

Roger Knights's picture

"FED will have an "uncle point"....the point at which it's self preservation will prevent further QEs."

I agree. It amazes me that more people can't see that the Fed does not have unlimited discretion--not remotely.

Yancey Ward's picture

I, too, believe there is an uncle point, but there is always the possibility that the Fed will not be the master of it's own domain.  Politicians may not give a rat's ass about the longer term viability of the Fed.  This intersection of central banking and politics is the real weakness in this belief.

ManOfBliss's picture

The Fed actually believes that monetization/QE is "good".

And, history shows, they do it until it collapses. They think that pumping dollars IS saying uncle.

DK Delta's picture

I heard Bernanke checked into GW University Hospital yesterday on complaints of constipation. Would a Dyschezia diagnosis qualify as a deflationary event?