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James Grant on European Crisis

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James Grant on European Crisis H/T to Joe of http://www.valueinvestingworld.com/ for the find.

Jim Grant on Squawk Box yesterday, talking about our monetary system (a favorite topic of his, but he always offers some great insight each time he speaks) Seth Klarman is a big fan of Jim Grant. Here is a story of colleague of mine who worked for Grant told me:

 Jim and Seth Klarman have known each other at least since the beginning of Grant’s Interest Rate Observer. Jim tells a story of how Seth Klarman interviewed him in 1983 about the publication (what his focus would be etc) before he would commit to paying $250 a year for a subscription.

Below is video and transcript:

jim grant editor of grant interest rate observer. it’s an independent contrarion minded journal. you must have rushed on the set. you look fine. you don’t have a whole lot of makeup on. thank you. the information is more important. than the look.we’ll do like kramcri kramer kramer. jim i asked the questionearlier, is this the final day of reckoning for a world binging on debt? is it playing out on that? no. friday will be the final day.oh, god. i mean for a long time you’ve warned about — a lot of our prosperity sits on top of a lot of paper money? we are, on monday coming up on a very important anniversary which is the 40th anniversary of the passing of this institution called brentwood woods which was the monetary arrangement bywhich if you were a favored bank you could exchange your dollars for gold at a fixed-rate and that anchored the monetarysystem. before that there were other aspects that resembled the gold standard. before that there was the real mccoy, you could choose paper or gold. we got away from that. for 40 years that experiment is ending, the experiment is unsecured, they called fiat money. that’s not so remote source of a difficulties we face. not so much that we’re in a world of chaos, we’re in a world of comeuppance. of comeuppance. having to do with our monetary arrangements. this is not divine will so much as monetary error which will be identified and rectified and fixed.what do we do and how can we — gold — but it will involvedevaluation. we have seen the dollar was one 35th of an ounce of gold. it’s now 1776th. absolute bottom. the dollar has undergone a terrific devaluation against that monetary asset which over time has tended to hold its value namely gold bullion. for example. we’ve been talking about nothing at least until a week ago then the united states credit — this country has the dubious privilege of paying their bills and the currency that they may print the dollar which privilege has been swell until you begin to count the debts that we have been allowed to so easily run up. because we have paid our bills in dollars for which there’s no collateral, no gold behind it, we have sent these dollars to asia, asians have scene them right back to us in terms of investment. in europe all these countries gave up their printing press. and that’s why they were in the world of hurt. the banks are levered 40 and 50-1 and the assets they hold do not support that kind of leverage. that’s the immediate problem.now tremendous most problem in europe is the same remoteproblem in this country with regard to monetary risk, there’s no check, there’s no balance on monetary emission, so it was true in the day that the world had reciprocal monetary system if one country were in deficit the country would adjust its deficit based on a real monetary unit. the united states has run trade deficits for 25 years in a row. we have spent our dollars, asians absorbed the dollars, sent them back to us in treasuryinvestments. we have not been able to check our progress because no one — why would we? we can finance it with — tell the opposite side of the story. asians have wanted our dollars.right? they have — if they were no good why in a free market did they take them? it’s not a free market. the chinese have suppressed — agree with that. but they wanted our dollars. they did. everybody tells us in some grand religious protestant epicterm of america over spending. here’s the story. america had the benchmark currency of the world and everybody wanted those dollars in order to liquify themselves. you can tell the same story in terms of the british sterling and same story in coin of the realm in rome. it was the standard of the world.people wanted those dollars. what’s different, steve, is united states dollar is the currency. people seem to want it. note that after the construction of these mountains that we live in a world of immense distortion. we can’t seem to pay them. we get downgraded. how much better it would be if we settled our accounts timely and in a monetary unit that’s no one nation’s –everybody talks about america as a corporation. if america were a corporation, and i nod the big paper that was written on that, how much of the current deficit would go into the capital account and not counted as a deficit. this downgrade of the unitedstates is a bit of a parlor trick. the united states, as anenterprise, the united states of america enterprise is aaa.there’s not enough a in the scrabble box to describe the ideas.but as an institution that has a reserve currency crush thisinstitution is in financial trouble and thabts what s&p — go back to the european bank. is it a fact 40 to 50 and what’s covering –mark to market. deutsche bank is a heavily levered institution.14? so they haven’t done any of the things that have happened.so when we say — leverage and banking in europe is much higher. not smoke turning into fire. 40 to 50 to one in terms ofleverage. a number that has something to back it up. i think that’s stunning. i haven’t heard anybody lay that out before. i think we’ll find out in about three second. deutsche bank is levered about that much. imd gue i would guess 40-1. jim, one of the big criticisms of the gold standard is it doesn’t give thegovernments the flexibility to react. that could also recommenditself. keep tint rate at a certain level. keep the fed’s level at a lower level. the government could respond with higher unemployment insurance or respond with stimulus. convince me that’s a better way to go about and run. it doesn’t tie the government’s hands during a time of recession. i can’t speak for everyone around the table but i’m for more rope with regard to the government’s hands. what ails us today is because ofgovernment initiatives. the sum total of these initiatives get you to $14 trillion in a debt crisis. i’m all in favor of more ropearound the hands of the government and less rope around the hands of people in enterprise. that doesn’t respond to myquestion. what about in a time of recession. let’s say being ridiculously optimistic, government kept its balance during regular times. from time to time to time the government will run.when the central bank is able to suppress interest rates to zeroand when the government can finance its debts with foreigncentral banks at neglible interest rates there’s no check on these debts. there’s no market check on what we borrow. we have a magic credit card. what this country needs is a debit card. the gold standard represents approximately a debit card.the reserve currency privilege is a credit card with no balancedue. that’s the formula for trouble whether you’re an institution or a human being as a consumer. it’s the wrong system. if i responded to you and i said we’re off the gold standard but taking out the ’70s the central banks had a good record in terms of inflation. how do you respond to that? how do you respond to that? taking out the ’70s? taking out the last week the stock market has been terrific. say all the gold in the world were to disappear overnight how would the world be tomorrow? if it were to disappear? an alchemist turned it in into tin. is that antimatter? would it evaporate? i would miss it myself. what’s the practical result of that. if the entire stock of treasury securities which people can’t seem to get enough ofdisappeared — i’m wondering. it would turn into silver or oil.gold is nice. it’s pretty. it’s yellow. it’s heavy. i still don’t get it. i don’t get it. if it were to disappear and you still had people producing great things like ipads and boeing jets, why not a claim on that. gold is when there’s a proper monetary standard gold is money. it’s not a speculative item. we wouldn’t be talking about it. nobody talks about gold, really, when the monetary system was functioning properly. gold becomes and i temple ofpreoccupation or obsession when the monetary system fails asit’s now failing. people want something that doesn’t lose its value. it is pretty. i don’t know it’s worth $2,000. what you said a moment ago, the u.s. gets downgraded. all right. people are pouring in to treasury securities. do you believe they are ludites? i believe there’s — treasuries are return free risk. at these levels you’re not getting paid. in fact the real interest ratesdon’t exist any more except way, way out in the treasury curveand you are suffering an immediate loss in your purchasing power. there’s no prospect of you regaining often years. what’s so interesting about the alignment of equity markets and debt markets the world over is that increasingly stock yields, equity yields are above government securities yields which we haven’t seen in this country on a continuous basis since late ’50s. in european it’s enormous. the spread is between good stable yields and guilt yields. in this country, microsoft nine times of earnings. johnson & johnson — people are flying. yes, american enterprise generates terrific products. generates terrific vitality. people are flying, the equity claims of those companies to get a real rate. turn the clock back until we go the u.s. system prior to ’33. british system prior to ’27 or austrian system — what we want is a modernized 20th century gold standard that checks the capacity of banks to print money. we want a gold standard. we want central banking and not central planning. what we got today is a system in which central banks try to impose prosperity through manipulation. so, prosperity, financial prosperity is a by product of stable minds. it’s not the thing you shoot for. the central bank of the united states is in the business of securities manipulation. when ben bernanke who means so well gets in front of your cameras and say the russell is at a high with proprietary sense they say that that’s the wrong approach to money. what we need is — very quickly, is there enough physical gold in existence right now? there’s one ounce per capita. there’s been one ounce per capita approximately for a long time. that’s random. tomorrow we could find a lot of gold that would to change the

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