People ... Investment Experts
Jeremy Grantham

Jeremy Grantham in conversation with Charlie Rose ... March 17, 2013 ... Transcript

Burgess COMMENTARY

Peter Burgess

CHARLIE ROSE: Jeremy Grantham for the hour next. ANNOUNCER: From our studios in New York City, this is CHARLIE ROSE.(BEGIN VIDEOTAPE) CHARLIE ROSE: Jeremy Grantham is here. Ask anyone and they will tell you he is a man of interesting ideas. He`sco-founder and chief investment strategist for GMO, an investment management firm overseeing more than $100billion. His prescient market calls over the 44 years of his career have identified numerous financial asset bubbles. Hecautioned investors during the Japanese bubble, the dotcom fringe and the subprime crisis. Today his urgent warningfocuses on population growth and threats to the world`s natural resources.I am pleased to have him here at this table for the first time, although we spoke by phone for an earlier interview for'Business Week'. Welcome. JEREMY GRANTHAM: Thank you. Nice to be here. CHARLIE ROSE: Great to see you. So how do you see the global economy? JEREMY GRANTHAM: In a long-term slowdown. CHARLIE ROSE: Yes. JEREMY GRANTHAM: I think unappreciated by most economists, mainly because they`re not interested in thelong-term. In the short term I have no -- no strong view, no conviction. We seem to be muddling through quitereasonably given all the obvious problems. CHARLIE ROSE: You worry about a number of things including the United States will never, ever -- or you don`texpect it to ever go back to the level of economic growth and GDP annually that it did in previous years. JEREMY GRANTHAM: Right. And I worry that the powers believe that it will. So clearly Bernanke seems to believeit will go back to three percent, the good old days. CHARLIE ROSE: Right, you don`t think that`s possible. JEREMY GRANTHAM: Well, the population, which is a huge input into GDP, its population times productivity and --or population plus productivity. And the population which often hit 1.5 percent while I was in America has dropped allthe way down to maybe 0.2, 0.3 and these are kind of official numbers adjusted for the fact that we work a little bit lesseach year. And that women, who hardly worked back in the 50s really created a big boost in -- in the number of peoplehours offered to the work force. CHARLIE ROSE: So that acceleration of women in the workforce has slowed down. JEREMY GRANTHAM: No it`s completely finished. CHARLIE ROSE: It`s finished. JEREMY GRANTHAM: It peaked out in about 2000. So now we don`t have a very rapid growth in people, womenhave finished. We work a little less. And as far as we can work out, we shouldn`t expect more than about 0.2 percentincrease in hours offered to the workforce. And in the old days it was, you know, well over one. So it`s dropped by apoint.And yet Bernanke`s estimate of three percent hasn`t dropped by anything. So by inference, he`s assuming that somehow Page 2Conversation with Jeremy Grantham: America and its Economic Future The Charlie Rose Show March 11, 2013Monday the productivity will accelerate by an offsetting one percent. And that is -- there is no possibility of that.Last 30 years, productivity has been 1.3 percent a year. And in the 40 years before that, after World War II it was 1.7,1.8, 1.9 -- so it`s actually decelerated.And there`s plenty of reasons to think it will modestly decelerate in the future so if you have 1.3 percent productivityand let`s say you hold that, which is fairly optimistic, and you add on your 0.2 percent for extra man hours, you`re at1.5. And not at three or not at 2.5 which is the IMF and the World Bank.And even at 1.5 it doesn`t make me happy because it treats resources incorrectly. It treats -- an increase in resource costas a boost to GDP. So if you drill a much more complicated well that takes more steel and more people, the GDP goesup. When I think it`s obvious to anybody that providing resources is a cost of doing business for the rest of theeconomy.And if you spend $150 producing a barrel of offshore Brazilian oil and the same barrel, exactly the same utility as the$10 Saudi barrel which is now gone, you are not going forward. And yet the GDP measurement clocks in everybody`semployment and so the more people you need to get a barrel of oil, they think the economy is stronger. And of courseit`s weaker.So we -- we worked that out and we say how fast is the rest of the economy growing. Take out the resource componentand the answer is in the last ten years, about 0.5 percent a year, 0.4, 0.5 percent a year less than is measured by theGDP. So we have to knock that off which takes our 1.5 down to a point. Now when the price of resources was decliningas it did for a 100 years up until about 2000, it was understated. Maybe understated by almost a quarter of a percent.When the price of resources are going down it makes getting -- getting wealthy much easier. And in total the typicalcommodity dropped by 70 percent over a hundred years. And then it turned on a dime and gave the whole 100 yearsback between 2002 and 2008. In six years it gave back a hundred years of decline. It went up more steeply than it did inWorld War II. It`s quite amazing no one talked about it, there was no fuss, there was no World War III.But suddenly we seem to be running out of cheap resources. And when we look for the reason, incidentally, it seems tobe steady population growth and perhaps more importantly, the enormous surge in China, 1.3 billion trying to growfaster than the 20 million South Koreans did 20 years ago, growing their demand for resources at 10 percent a year. Andpretty soon you end up with numbers that don`t seem to compute very easily.China uses 53 percent of all the cement used on the planet -- not traded, just used. They use 47 percent of all the coal,46 percent of all the iron ore. These are unimaginable numbers. And if they mean to even slow down to seven percent, itmeans 10 years from now we`ve got to find another 47 percent coal, just for China. CHARLIE ROSE: But let me just stay with the demand in China. China is trying to shift from an exporting economicmodel to domestic demand economic model. Will they be successful at that? And if they do, because of a rising middleclass in China and population growth, will that also serve as new markets for Europe and the United States, and LatinAmerica? JEREMY GRANTHAM: Of course it will. CHARLIE ROSE: And therefore economic growth. JEREMY GRANTHAM: Yes, it`s a good engine in the short term for economic growth. The problem is it`s incrediblyenergy intensive. And if they mean to keep growing at these rates, they are chewing up coal and oil. CHARLIE ROSE: And polluting -- and polluting their environment. JEREMY GRANTHAM: That has enormous environmental consequences which in the end could be quite deadly. But Page 3Conversation with Jeremy Grantham: America and its Economic Future The Charlie Rose Show March 11, 2013Monday in the short term it pushes up the price of oil. And what has happened, the most important thing, really, in resources isthat the price of oil, which was $25 bucks a barrel in 2000, is approximately a $100 today. It`s four times. It`s also half the cost structure of all the other resources.So when it goes up four times, if you are mining copper, you`ve got to spend four times the amount on your energy.Plus the quality of your copper ore is declining, so maybe you have to spend eight times as much. And so the pricekeeps going up.So if China continues to grow at these rates, yes it will stimulate global business and B, it will keep pushing up theresource prices. And resource prices have been rising faster than global growth rate so they are squeezing the rest of thesystem.CHARLIE ROSE: Why were you opposed to the Keystone Pipeline, because a lot people think we need all the --(CROSSTALK)JEREMY GRANTHAM: It`s very simple math.CHARLIE ROSE: -- fossil fuel we can get.JEREMY GRANTHAM: There`s a short term, medium term, long term argument against them. But the long term is thecarbon math is pretty simple. We have pushed up the temperature by 0.8 degrees centigrade.CHARLIE ROSE: Global warming.JEREMY GRANTHAM: Global warming and you see the effect. Everybody sees the effect in New York floods andburning up the Midwest and burning up the whole of Russian wheat crop last year too and so on around the planet, forthree years in a row it -- it is really getting quite obvious. And spring arrives a couple of weeks earlier than it used to.You can`t really miss it.And we know what it took to push it up 0.8 degrees centigrade. It took a certain amount of carbon dioxide which we canmeasure carefully and we can calculate how much it would take to push it up to two degrees. Two degrees is generally-- centigrade is generally agreed by climate scientists and others to be a boundary. You go above that and you willcertainly have really dire consequences which will get worse for a long time because these things flow very slowlythrough the system.Stay below two degrees and we -- we might limp our way through this. And so we can calculate how much in the wayof carbon it would take. It`s actually 565 gigatons.CHARLIE ROSE: Yes.JEREMY GRANTHAM: It`s a lot of carbon but the bad news is that we already have in our proven reserves five timesthat amount. So we have enough to completely cook our goose and guarantee that our grandchildren are near starvationand so on with floods and --(CROSSTALK)CHARLIE ROSE: And do you think we will?JEREMY GRANTHAM: No, I think -- I`m not optimistic about the common sense of -- of our species.CHARLIE ROSE: Of our species or our politicians? Page 4Conversation with Jeremy Grantham: America and its Economic Future The Charlie Rose Show March 11, 2013Monday JEREMY GRANTHAM: Right of our species, no particularly the politicians. But I do think that in a real crisis whenthings really start to go wrong that we will belatedly have some determined --(CROSSTALK) CHARLIE ROSE: Haven`t things already really gone wrong? JEREMY GRANTHAM: -- enough for scientists to be frightened. But not enough to frighten the average guy in thestreet. CHARLIE ROSE: Here`s what is interesting about you. I mean, to listen to you talk about economics and listen to youtalk about the environment. I mean you are a numbers man. JEREMY GRANTHAM: Yes. This is entirely numbers-driven. CHARLIE ROSE: Yes. JEREMY GRANTHAM: That`s how I got into this trouble. You just look at the numbers and they say watch out, we`regoing to fry. And if you mean to pump tar sands, we`re going to pump all the good oil, all the good old- fashioned highquality, low cost oil, we`re going to pump all that and we`re going to pump all the traditional natural gas.But if we mean to dig all the coal and we mean to scrabble through the tar sands, extremely costly and utterly ruinousenvironmentally, not just carbon dioxide but just terrible things that they are doing to our earth, then we`re toast. Wehave no chance.And -- and by licensing that pipeline we`re saying to the world, we`re going into round three. We`re going to start facilitating the flow of such utterly dangerous energy resources that we have no reasonable hope of surviving with theplanet as we know it. It`s a very nice planet --(CROSSTALK) CHARLIE ROSE: Yes. JEREMY GRANTHAM: -- and it has a lot of biodiversity still left. CHARLIE ROSE: Right. JEREMY GRANTHAM: We -- CHARLIE ROSE: And undiscovered, even. JEREMY GRANTHAM: Yes and we humans are probably taking care of maybe 10 percent in the last 10,000 or 12,000years. But we are racing through in terms of getting rid of biodiversity. This is known in the trade as the 6th greatdie-off since the beginning of time. And it`s happening at lightning speed by -- by previous --CHARLIE ROSE: You are sounding Malthusian.JEREMY GRANTHAM: Well Malthus wasn`t interested in the die-off of the species. CHARLIE ROSE: But he was interested in food. JEREMY GRANTHAM: Yes -- well, Malthus described the past very accurately. We had spent let`s say 12,000 yearsliving with our noses pushed up against the boundary of food supply. And sometimes there would be four or five badyears and they would die. And sometimes they would have a great run of 20 years and they would multiply. Page 5Conversation with Jeremy Grantham: America and its Economic Future The Charlie Rose Show March 11, 2013Monday But that was the determining factor, like a rat population. We just move back and forth and right up until his time. Andthe -- the terrific irony is as he is signing his book which is 1798, they`re digging the first coal.So that -- the coal and then oil & gas bought us a time-out, an amazing, but short time-out which will probably be about250 years in which you have almost infinite energy, a gallon of gasoline is -- is something like 200 man hours of labor.You know try pushing an SUV uphill and you will realize how powerful --(CROSSTALK) CHARLIE ROSE: Oil is. JEREMY GRANTHAM: Oil is and gasoline. CHARLIE ROSE: Right. JEREMY GRANTHAM: And so ordinary people became in a sense, richer than the kings had been in the past. And itmeant surplus, food, population growth, civilization, science -- all of these wonderful things but we only had a limitedsupply, millions of years of stored energy from the sun. It`s in your bank account. And we`re draining down the bank account without any real regard for what we`re doing. And what it leaves our children and our grandchildren. It`s ourinheritance and we`re running through it.CHARLIE ROSE: And what are you doing about it?JEREMY GRANTHAM: Basically everything I possibly can. CHARLIE ROSE: Protesting a pipeline. JEREMY GRANTHAM: No, no, we have a foundation -- CHARLIE ROSE: You especially give to the foundation. JEREMY GRANTHAM: For the protection of the environment. And the money we get goes into it. And we spend it aseffectively as we can to combat some of the nonsense out there in the airwaves. If you -- if you have most of your stock value in the value of your oil reserves or your coal reserves, you will be pretty reluctant to entertain the thought that itwould be poisonous to our long-term well-being to -- to pump it out.So they are. And they oppose it. And they`ve opposed it very effectively and the propaganda has been -- has beensuperb. But as I have often said it leaves me with the question have they no grandchildren these people.CHARLIE ROSE: Let me -- let me move to agriculture because I`m -- I`ve gotten a little bit interested in agriculturebecause of Bill Gates. Bill Gates is really interested in agriculture now. He just went down to Mexico and he and CarlosSlim launched some project down there. You`re interested in agriculture. JEREMY GRANTHAM: Certainly. CHARLIE ROSE: Yes how did you become interested in it and what have you learned about it. And why do we care? JEREMY GRANTHAM: We got into resources via the numbers. CHARLIE ROSE: Right. JEREMY GRANTHAM: We had always studied asset class bubbles. CHARLIE ROSE: Right. Page 6Conversation with Jeremy Grantham: America and its Economic Future The Charlie Rose Show March 11, 2013Monday JEREMY GRANTHAM: And looking through the bubbles we thought we had found a situation where every singlebubble had always broken without exception. And then I began to realize the oil had spiked quite a long time ago and was never going to come down to the old price it was $16 a barrel for 100 years until OPEC in 1974. CHARLIE ROSE: Right, right. JEREMY GRANTHAM: And then it jumped to 35, what I call a paradigm jump which was unique in any large assetclass. And it traded for about 30 years with the usual great volatility -- oil is very volatile -- around $35. And then in thelast few years it took another jump to about $80, $85 which is a whole lot different from $16. And you can wait as longas you like until you die of old age. It`s not going back to $16. And the reason is --(CROSSTALK) CHARLIE ROSE: Yes is it going back to $35? JEREMY GRANTHAM: No, this is cost driven, you go to Shell, go to BP, ask them what does it take in your mind tofind a decent amount of old- fashioned oil? And they will tell you, $80, $85. CHARLIE ROSE: This is again how you look at numbers. There is an impending shortage of fertilizer, according toyou, yes? JEREMY GRANTHAM: There is a guaranteed long-term shortage. And that`s what separates most of our work fromthat of other people. We find that oil is a paradigm shift. CHARLIE ROSE: Right. JEREMY GRANTHAM: We then say well why shouldn`t it apply to all the other things that are in the ground. And wefound it did. And then we created our index showing that the price had declined for a 100 years and then exploded. CHARLIE ROSE: Right. JEREMY GRANTHAM: And then within that subset I started to say, and which is the tightest, most problematicalsituation and that brought to us phosphate oil to phosphorous. CHARLIE ROSE: Right. JEREMY GRANTHAM: And the scary thing about phosphorous which really does give me goose bumps though, whenI think about it, it`s -- it`s an element. You can`t make it. You can`t substitute for it and no living thing -- humans,animals, vegetables, everything needs phosphorous to grow. You can`t grow anything without it, and we are mining it inwhat we call big AG, big agriculture. CHARLIE ROSE: Right. JEREMY GRANTHAM: We`re mining it. It`s a finite resource, now that should make you pretty scared. CHARLIE ROSE: Yes. JEREMY GRANTHAM: And you can calculate how long it will take to run out. And if you were for a second to takeout one country, Morocco, and say we will ignore their wonderful, cheap, high quality reserves, a dried up ocean,incidentally, how much have we got left?And the answer is at two percent a year growth to allow the Chinese to eat a bit of meat now and then we`ve got maybe50 years. Page 7Conversation with Jeremy Grantham: America and its Economic Future The Charlie Rose Show March 11, 2013Monday U.S. housing bubble done statistically was a much more impressive bubble than the tech bubble. Because the U.S.housing market unlike the stock market had been very stable going back into the midst of time. It would bubble inChicago or Florida but it would bust in California. So it was perfect. Until Greenspan and then a great surge of debtpushes up the price of houses, and on our data, it was the kind that would occur randomly every 10,000 years. By theway, Bernanke did not see this. He said oh, the U.S. housing market merely reflects a strong U.S. economy.CHARLIE ROSE: John Paulson saw this and became a multibillionaire. Did you see it in the same way? And did youact in the same way? JEREMY GRANTHAM: My job, just to focus on what I do, is to inform our clients and write a quarterly letter. CHARLIE ROSE: But don`t you have money under management? JEREMY GRANTHAM: Our team, of 550 people run a hundred different funds. CHARLIE ROSE: Of worth over a hundred billion dollars. JEREMY GRANTHAM: And I don`t hesitate to nag them but I don`t have line responsibility. I delivered my -- CHARLIE ROSE: Are they listening to Jeremy at the time? JEREMY GRANTHAM: Mostly they do. But you can`t -- you can`t run a big firm on imperial fiat. You have to allow asmall group of people with self-confidence to make their own decision. But I can tell you what I said. I said I have aproblem, dear reader, in that I have been bearish for a long time. The market in my opinion was basically overpriced for20 years. So how am I going to get to you take this seriously because this is the real McCoy? And I have thought aboutit for a couple of weeks, and this is it. And this is July `07. I believe at least one major bank will fail. Broadly defined, meaning the definition of bank. CHARLIE ROSE: Hello Bear Stearns. JEREMY GRANTHAM: Hello Bear Stearns, Lehman, AIG, et cetera, et cetera, plus a couple that would have failed butwere taken out. Plus a couple more very, very big banks like Citi that would have failed unless we the taxpayer hadcome to their rescue. CHARLIE ROSE: Was that the good thing to do, come to their rescue? JEREMY GRANTHAM: You had to keep a few banks, Morgan and Wells maybe in business. We should have let -- CHARLIE ROSE: You would have let Citi -- JEREMY GRANTHAM: I would have let a couple of big ones go. CHARLIE ROSE: Would you have let Citi go? JEREMY GRANTHAM: Yes, I think so. CHARLIE ROSE: you really would. JEREMY GRANTHAM: Yes, it would have sent a shockwave through the system. CHARLIE ROSE: But -- look what happened when Lehman went down they let it go. Look what happened. JEREMY GRANTHAM: I know. Once you let Lehman go, I would have let Citi go as well in order to make the point that we were not going to stand behind every enterprise that made ludicrous bets and then got bailed out by thetaxpayer. Then I would -- of course, you have to draw the line. You can`t afford a run on the bank. Any solvent bank, Page 16Conversation with Jeremy Grantham: America and its Economic Future The Charlie Rose Show March 11, 2013Monday that famous American Christmas time movie shows, if everyone comes to withdraw their money, they go bust temporally because it`s all tied up in long-term mortgages.And that applies to the banking system. It is universally agreed that the role of a central bank is to make sure that a runon the bank doesn`t happen. But it is not agreed that they should support a bank that is insolvent. Citi was insolvent. A lot of banks were insolvent. In other words, if you just marked their assets to market they were underwater, they had no assets. They had made mistakes. They called the market wrong. They should pay the price. CHARLIE ROSE: There was this circumstance. Standard & Poor`s, look, and Dow Jones are approaching record levels;merger activity way up. Warren Buffett and some Brazilian investors just bought Heinz, OK. Everybody thinks thingsare getting better. You seem to say yes, short term, long term no, no, no.Correct me. JEREMY GRANTHAM: Our long-term argument has nothing to do with the market. CHARLIE ROSE: Right. JEREMY GRANTHAM: You can do perfectly well in a portfolio in an economy that`s growing very little. CHARLIE ROSE: Right. OK. JEREMY GRANTHAM: It has to do with profitability. I have no reason to think good companies will not be profitable so this is not about the stock market. That`s about the long-term economy, which is going to grow more slowly. CHARLIE ROSE: So what is this about? JEREMY GRANTHAM: So you can make, you can make good money in the long-term in cheap stocks. What it`s about is value. If you have a market that becomes overpriced, you will make a return too little given the risk you take.The U.S. market is not too bad for the great franchise companies. The great Coca-Cola, they`re not -- they`re a little bitexpensive. But the balance of the market is very expensive. And it`s very expensive because we assume profit marginswill go back to normal and prices in every way will go back to normal, back to the trend line.And if we do that, we get miserable zero returns from the rest of the market in the U.S. Now you get better returnsoverseas. You get almost reasonable returns from emerging market equities. So it`s not a terrible situation. `07 wasoverpriced across the kitchen sink. Everything in the world this is merely -- CHARLIE ROSE: It`s amazing so few people saw it. JEREMY GRANTHAM: Well, that isn`t true, by the way. I have a story up my sleeve here and that in the -- CHARLIE ROSE: You`ve been waiting to pull. JEREMY GRANTHAM: In the great bubble of 2000, there weren`t many people who were willing to debate the bulls.And so they dragged me out over and over again. And I thought well, if we`re going to go down with the ship, we mightas well go down with the flag flying. So I went out and debated them.And my price for giving a talk amongst professionals, say the annual bash of the financial analyst, 1,200 people in LosAngeles, was to say how many of you are full-time stock professionals, and 300 people put their hands up. I say right, Ihave just two questions. If the price earnings, the measure of how expensive the market is currently 32 -- if it goes downto 17, which is trend line, will it guarantee a major bear market? Every single one of the 300 agrees. And by the end I Page 17Conversation with Jeremy Grantham: America and its Economic Future The Charlie Rose Show March 11, 2013Monday had 1,200 votes of full- time professionals. So they all agreed, every single one of the 1,200, if it went down to 17 timesearnings, it guaranteed a major bear market if it happens within a 10 yr window.So the jackpot question is how many of you think it will? And it was so shocking to me I had to rephrase the questionthree times before I would actually -- CHARLIE ROSE: Because nobody raised their hand. JEREMY GRANTHAM: Only seven people thought it would not go down. CHARLIE ROSE: Right. JEREMY GRANTHAM: So 99 percent of the engine room at all the great firms knew very well that the market wasvulnerable, would go down and would guarantee a major bear market. But the spokespeople who employed those guys,the spokespeople for the firms were on the podium with me saying oh, we`ll muddle through quite nicely. I won`tmention their names on the air. But they`re very famous people and they said oh don`t get hysterical, we`ll muddle through. CHARLIE ROSE: Jeremy is always putting down things. JEREMY GRANTHAM: Absolutely. But the people who are doing the dirty work knew better. They agreed with me.And the reason is simple, being bullish sells. You will not easily hear honest advice when it is bearish. CHARLIE ROSE: OK. So just in case somebody tuned in to this late, so you are, where are you today? To repeat whatyou said -- JEREMY GRANTHAM: We`re slightly underweight global equities, heavily underweight in the U.S. outside thequarter of the market that are the great Coca-Cola franchise companies. And I`m not touting Coca-Cola. I`m just using them as a generic. CHARLIE ROSE: Yes. JEREMY GRANTHAM: So it`s not a terrible outlier situation like Japan that we described or so on. It`s just, be carefulwhen you`re buying ordinary American stock. CHARLIE ROSE: Do you see another -- do you see a bubble out there? JEREMY GRANTHAM: Well, the nice thing about bubbles is you don`t have to predict them, you just wait and see.And when you see one you jump. CHARLIE ROSE: OK. But I mean are you seeing one? JEREMY GRANTHAM: You want me to guess. CHARLIE ROSE: Yes, I want to you guess. What bubble and when? JEREMY GRANTHAM: I think Bernanke is as I was writing, is whipping this donkey that can only grow at onepercent, this economy, because he thinks it`s a racehorse that should be growing at three. So he`s going to keep on whipping this donkey -- CHARLIE ROSE: This donkey can`t run. JEREMY GRANTHAM: -- until it either drops dead or turns into a racehorse - - Page 18Conversation with Jeremy Grantham: America and its Economic Future The Charlie Rose Show March 11, 2013Monday CHARLIE ROSE: Yes, right. JEREMY GRANTHAM: -- which is unlikely. CHARLIE ROSE: And you are betting on dead. JEREMY GRANTHAM: And I`m betting on dead. So, it is a very unsafe situation to have the most powerful person inthe economic world by far -- CHARLIE ROSE: But he`s trying to do something. I mean he`s trying to use the fed to create employment, how aboutthat? JEREMY GRANTHAM: They don`t have the tools to generate employment. They shouldn`t have that in their mandate.They should just have in their mandate -- CHARLIE ROSE: So low interest rates and stimulus won`t do it. JEREMY GRANTHAM: No, absolutely not. You need fiscal means. If you have people unemployed, by all means douseful projects to employ them. Go and install sensible solar panels -- what I am trying to say is insulation. Go andinsulate every northeast and every cold area, it will have a high societal return. You`ll never regret it. Redo the gridsystem. You`ll never regret it. CHARLIE ROSE: Right, right, right. In other words, you`re saying if you want to create jobs, create jobs to buildsomething we need. JEREMY GRANTHAM: Absolutely. And debt is vastly exaggerated which is a huge, huge -- CHARLIE ROSE: Ah, let me hear that. Debt is exaggerated?JEREMY GRANTHAM: -- yes, it`s a huge topic.CHARLIE ROSE: So you and Paul Krugman are right on. Correct? You and Krugman are one of the same voice? JEREMY GRANTHAM: Let me tell you something about debt. In 1982, if you added all the debt up it was 1.25 timesthe size of the GDP. And then, and it had been fairly flat for a long time, drifting slowly up. And then it kinked 45degrees and it goes shooting up steadily without too much volatility. Just goes straight up. CHARLIE ROSE: When was that? JEREMY GRANTHAM: `82, 1982 -- and it goes steadily upwards to 3.5 times. So we had this amazing -- CHARLIE ROSE: That`s when Ronald Reagan was president, `82. JEREMY GRANTHAM: Yes, right. And so we had this amazing experiment -- the biggest economy in the worldalmost tripling its ratio of debt over a block of time that really counts -- 30 years. And what happened in terms of thegrowth rate of the system, it slowed way down. Now there are other reasons I grant you that. But there`s no room in thatequation to believe that increasing debt has anything to do with long-term growth. Is there?That you triple it, what more can you do, and the growth rate of our system slowed materially? It`s so contrary, isn`t it?They are the facts. They are so contrary to the general belief. We have been conned into believing by the financial worldthat debt is everything. Let a bank go, oh my God it would be the end of the world.There are plenty of reasons why this economy collapsed, by the way, quite sufficient. You don`t even have to useanything to do with the collapse of the financial system. We had a housing bust. We had a housing one-in- 10,000 year Page 19Conversation with Jeremy Grantham: America and its Economic Future The Charlie Rose Show March 11, 2013Monday event. If that was to go back to trend, you were going to lose $10 trillion, $11 trillion, $12 trillion. Everyone was goingto feel poor. It was going to devastate consumer spending and consumer confidence.Secondly you had the price of oil triple. Look what happened in the oil crisis of `74 and `79. They had a big recessioneach time. So you not only tripled the price of oil, you tripled the price of food, you tripled the price of copper, of all themetals. Why would that not have caused a major recession?They had two great reasons. The housing market collapsed and the commodities had just squeezed you to death. Youdon`t need a third reason to explain why we had the most serious recession. And housing market alone explains why ithas been very, very slow to recover because there`s nothing more dangerous than messing with houses. CHARLIE ROSE: So you are, you are an unreconstructed -- you`re just a pure Keynesian aren`t you? JEREMY GRANTHAM: I am a pure numbers guy. And if -- CHARLIE ROSE: No, but I mean -- you are -- you`re a proud Keynesian, are you not.(CROSSTALK) JEREMY GRANTHAM: No, I wouldn`t say that. CHARLIE ROSE: Well, why would you not say that? JEREMY GRANTHAM: Because I`m a great admirer of Chapter 12 of the general theory which is about the stock market. He was wonderful in the stock market. He was about 60 years ahead of the economic world. You don`t know how many years ahead he was because they still haven`t caught up. He basically said it`s animal spirits, guys, that can mess up everything. And he pointed out the game we play in the stock market is managing your career. Never make a bet on your own. CHARLIE ROSE: Would Keynes have agreed with you about debt? JEREMY GRANTHAM: I don`t know. I really don`t know. It`s such a different world now. The levels of debt are somuch higher. He would probably have some ingenuous new theory.CHARLIE ROSE: OK but I mean most people believe that we do have, I mean they look at the percentage of GDP to debt or debt to GDP. JEREMY GRANTHAM: I can prove that debt does not generate long-term growth. I have given you the numbers. CHARLIE ROSE: It does not prevent. JEREMY GRANTHAM: It doesn`t cause long-term growth it doesn`t create it. Debt, we triple the debt and GDPgrowth rate went down. There is no evidence that increasing debt increases GDP. And yet that mandate has been givento Bernanke who thinks apparently that it does.By keeping interest rates low, you`re transferring money away from retirees who spend every penny and are reallyhurting. And by the way, there`s far more of them every year now than there ever was when economic theories werebeing panned out. You take money from them, and who are the beneficiaries -- the guys who run the hedge funds andthe banking system in general and speculators and corporations theoretically can use it to build. But they`re buildingless now than practically in history. There is no major league capital spending boom going on. CHARLIE ROSE: What should be the levels, for example of new revenues to spending cuts? Page 20Conversation with Jeremy Grantham: America and its Economic Future The Charlie Rose Show March 11, 2013Monday Charlie Rose / Jeremy Grantham Transcript Download or Print Add To Collection 27 READS 1 READCASTS 81 EMBED VIEWS Published by Devon Shire Follow Search TIP Press Ctrl-F to search anywhere in the document. Copyright: Attribution Non-commercial Download and print this document Choose a format to download in .PDF.TXT © Copyright 2013 Scribd Inc.Language:English