Institutional Investor, February 1997

Grant's Doom

by Susan Webber

James Grant certainly has gotten his timing right this time. His latest book, "The Trouble with Prosperity", a cautionary tale about the inextricable linkage between booms and busts, arrived in bookstores just as the stock market, already valued at stratosperic levels, began its dazzling postelection rally. It is required reading for market skeptics and enthusiasts alike and, in particular, anyone under the age of 35.

Grant, who writes and publishes the New York-based "Grant's Interest Rate Observer," a biweekly market commentary, is something of an anachronism. His perspective on modern finance is firmly rooted in history; his rich, highly literate, elegantly ironic style harkens back to the Victorian essayists. ("Gold was still the official U.S. monetary collateral," he remarks, "but, like the H-bomb, it was deemed to belong to the public sector.") He proselytizes for a strong form of the boom-bust thesis identified with the Austrian school of economics, namely that expansions carry the seeds of their own undoing and that busts are salutary and necessary for recovery.

The book itself is less a proof of this theory and more a fabric of related motifs. Grant organizes his narrative around themes, from the perturbations of Wall Street real estate to the current respectability of gambling, drawing on a vast and wide-ranging store of anecdotes and information. It's a gutsy way to write, for Grant often digresses to interject a quote from an obscure, if acute, economist or to relate a relevant, if distant, incident. At his best (which is most of the time), he produces a kind of inspired improvisation; at his worst, his energy flags and he meanders.

The book picks up strength as it progresses. The least lively chapter (although an important contrast to the current conventional wisdom) is the first, which discusses post-World War II inflation and the dramatic underpricing of credit. Grant grows more passionate and interesting later, when he rails against indifference to risk, the socialization of credit and misplaced faith in the omnipotence of central banks. He offers a particularly compelling analysis of Federal Reserve Board actions in the early 1990s, arguing that since the recovery was well under way before the Fed even acknowledged anything was amiss, it deserves little credit for the brevity of the recession.

Grant can sound like a prophet shouting jeremiads into the wind. He seems to feel personally vindicated when market excesses lead to collapse. Needless to say, the wild bull market of the '90s is particularly offensive to his sense of morality. His skepticism turns to scorn as he recites how former heresies, ranging from derivatives and momentum investing to chronic deficits and managed currencies, are now conventional wisdom. He derides both central bankers (for stabilizing markets during crises such as the unwinding of Sumitomo Corp.'s copper losses) and the Beardstown Ladies (for radio promotions of the New York Stock Exchange). Although it makes for entertaining reading, one begins to wonder why Grant is so bothered. Does he have a money manager in the family?

Despite Grant's convictions, a bit of cognitive dissonance crops up. He asserts that the Fed lacks much influence over the economy, yet complains that the government safety nets stanch therapeutic recessions. He notes that the recession of 1990-'91 was too shallow, given the preceding and succeeding booms, but Grant is unable to explain it. He applauds the Schumpeterian "creative destruction" of recessions, yet, like his Austrian forebearers, he acknowledges that the Great Depression featured a "secondary depression" of deflation run amok, which was not constructive and not obviously explicable.

These are minor quibbles, however. More limiting is that Grant, as his newsletter title explicitly suggests, relegates himself to the role of observer. His narrow focus on economic history means that he steers clear of larger social issues that are now inevitably part of any policy discussion. Indeed, his deep nostalgia may well be misplaced. Excesses of the 1920s led to depression not only in the U.S. but also in Europe, producing fertile breeding ground for fascism.

It may be that in a CNN-influenced world, the opportunity costs of weaker economic growth, which are invisible, hard to measure and harder to prove, will always appear a better choice than the altogether too tangible specter of lost jobs and savings. As impressive as it is, Grant's latest opus is still a descendant of that classic, Charles Mackey's "Extraordinary Popular Delusions and the Madness of Crowds". It may be time for him to turn his prodigious talents to producing a truly pathbreaking work.