Here is the pertinent video clip of James Grant.
"The 2007-2009 real estate debacle is the monetary equivalent of a chain reaction on a foggy California freeway. The trouble with our monetary mandarins is they [the Fed] believe impossible things. They have persuaded themselves that the central bank can pick the interest rate that will cause the GDP to grow, payrolls to expand, and prices to levitate by just two percent a year, as they measure it. It is impossible as experience and common sense attest. Yet, they hold it to be true. ... William F. Buckley famously and persuasively said that he would rather be governed by the first 400 names in the Boston phone directory than by the faculty of Harvard. Unaccountably, this Congress has entrusted the value of the dollar that we own, that we transact to an independent committee dominated by monetary scholars. In one short generation we have moved to the PhD standard from the gold standard."
Grant is correct. The result has been a series of economic bubbles with increasing amplitudes over time.
We're Smarter Now
Jim Grant is spot-on in his description of what has transpired: “We have replaced the Gold Standard with the PhD Standard."
Consistent with our post-Modern zeitgeist, we have traded the wisdom of old for the cockiness of what I call the “We’re much smarter now” syndrome. Hence the propensity of Western governments over the last 50 years to deplete their supplies of the “barbarous relic” as Gold’s time “has passed”.
Tulips, South Sea and Florida Real Estate ventures, Roaring ‘20’s stocks bought at 10x leverage as a norm, as well as innumerable investment ideas since 1971 when Nixon closed the Gold window are all examples of investments based solely on confidence, the ebb and flow of which resulted in volatile “risk on and off” episodes.
The last material loss of confidence in the system was in 2008/early 2009; which resulted in a series of experiments whose 9-year anniversary is upon us.
What happens when Common Knowledge changes and moves over to something else that “everyone knows that everyone knows”? Not unlike the ferocious tornados which rip across the American continent when winter turns to spring, the change may be rapid and violent.
The PhD standard - that may very well bring us a round trip to the ’09 lows. In its place will be what history has defined as tangible and trusted stores of value. Investors will trade “we are smarter, see farther and can manage all outcomes” for a more historically informed “we don’t really know what the future holds, but we do know what everyone everywhere will take as tangible value no matter what comes to pass.”
To conclude, here are a series of current charts which we believe lend credence to why we suggest that a material allocation to Physical Precious Metals held OUTSIDE the status quo financial system is warranted for any investment portfolio.
2008 Lessons Not Learned
Here we are in equity and junk bond La-La land, with Trump starting trade wars and threatening real wars, and with the Fed hiking away, totally ignorant of the bubbles they created, just as the economy is weakening.
Good luck with those PhDs.
Mike "Mish" Shedlock