December 11, 2012

Jim Grant on why the Fiscal Cliff is Another Y2K Moment

Transcript: But the fiscal cliff does not really worry my next guest. he describes it as the y2k of the moment. joining me now to explain is a well-known fed critic jim grant. he's founder and editor of grant's interest rate observer. you say this is like y2k. no big deal. came and went. you're not worried about it. you say the markets aren't goingto fret over it. i don't mean to be quite so dismissive. certainly my experience of problems that are most ventilated are the ones that are least menacing, in fact. the more you talk about something, the more it's likely to be discounted. we've done nothing but talk about the fiscal cliff. at the time all we did was talk about y2k. right. i'm thinking this is the not thing. so what we're not talking enough about is what the fed's stimulus policy has been. is this a bigger threat? is this a bigger worry for you? tell me what you're worriedabout. the fiscal cliff is the present value of these immenseunfunded liabilities. numbers of $80 trillion and up. the question is whether there will be good dollars to pay back those who have lent against those liabilities. it seems a stretch to think there will be.but there's many years to come yet. so we have a fiscal requires growth and requires good money. it does not require skies full of paper dollars, such as a the confetti we're seeing from the fed. it's unbelievable to me. the demographics of this thiscountry have changed so much. we're living longer. we're needing, you know, medicare longer. folks are even, you know, working longer. yet, these programs have not been changed in so many years, or ever. well, i think we might get around to doing this. but december 21st is not what it's going to happen. all the talk today and tomorrow will be about the fiscal cliff. that's not the thing. in the meantime, in the background, there's these very interesting assertions of what is and is not risky. the financial times had a piece observing that for the first time in 50 years british lifeinsurance companies or pension funds held more bonds thanstocks. it reminded me of the fact that fidelity is now managing more bonds than stocks. the world over there is a, if not a migration, then certainly a movement towards those assetscertified as safe. it seems to me given the backdrop of what our central banks are doing, the assets certified as safe are almostceriably unsafe. 145 years in operation, great franchise. so what is the risky asset? it seems to me that the world is set up for something that has nothing to do with the validation of this claim that bonds are safe. meanwhile, people are actually losing money by keeping their money in fixed income. you're not getting any return. today bernanke said at the economic club lunch that hedidn't want to suggest that the economy is going to be troubled until 2015 just because he's keeping rates at low levels until 2015. what are the implications of keeping rates at those levels until 2015?what we have done in this election is not only re-elected the president but re-elected bernanke-ism. he'll leave or not in 2015.there will be someone to succeed him that will be as liberal ordubbish as he is. our economists dream up this formula that describe the path they say of economic activity. they provide the confetti or the money to f the path of growth or nongrowth. it is the triumph of a seat of the pants central banking. this is what the country has signed up for with bernanke and his evident successor. that, to me, is a substantial problem on the to this, the fiscal cliff. this is the reality we face. so what do you do an as investor? we have institutions watching.

Source: CNBC

James Grant originated the "Current Yield" column in Barron's before founding Grant's Interest Rate Observer in 1983. He is the author of five books, one of which is Mr. Market Miscalculates (Axios Press, 2008).