Jeremy Grantham on the government debt problem

Going back to my last post, the point I was making there is that government economic policy should be geared toward helping to maximize the efficient long-term use of real resources. The goal has to be on the real resources. In the video below, which is an excerpt of a Charlie Rose interview to be aired tonight, Jeremy Grantham says pretty much the same thing.

Here’s a bit of the transcript, talking about government debt:

I feel – I guess – that it’s substantially too high. I guess that you shouldn’t try to make it low in a hurry, but you should have a 20-year plan to chip away.

We’ve gotten ourselves into a bit of a rathole, and we should be careful getting out of it, but it is not the overwhelming thing that will dominate our future.

What it does is it distracts us from the real world. Debt is an accounting world. It’s paper. The real world is the quantity and quality of your people and the quantity and quality of your capital spending.

Are you building new machines? Are you being inventive? Are you training your people? Is your high school system delivering the same education that it used to relative to the South Koreans and relative to the Norwegians?

No, it’s not.

We should worry more about the real world and less about the paper world. And somehow we’re in this death grip that only paper things matter. And so there’s much too little attention spent on education, training, capital spending – finding a way to beef it up.

And also, I’d rather stimulate the economy directly through government spending than I would like to play games with the monetary system and games with the interest rate, inflicting great wounds on retirees and so on, and transferring wealth to people who won’t spend it.

We’re transferring wealth from the poor to the rich by keeping interest rates low. I’m not even sure the economy gains at all by a low interest rate, and furthermore, no one has established convincingly that it’s a good idea.

It’s a tradition that it’s a good idea. And that’s not the same. We’ve had lots of traditions, like that the market would look after itself – that people wouldn’t be crooks because economic theory assumes that they’re not.

But they often were crooks, and greedy, and short-term oriented, and willing to dance until the music stopped – although, as Soros said, the music had actually stopped long before.


That’s very much the point. And I would also add that given that the US uses government money as the currency of account, there is no government budget constraint in the short or long run. Though even so-called Keynesians like Paul Krugman act like there is. The reality is that government can spend as much as it wants because it pays for everything with IOUs it manufacturers i.e. government money. The REAL constraint is just that REAL resource use and real resource allocation. To me, this is where the focus has to be.

And note Grantham’s comments about fiscal versus monetary policy. QE and other financial engineering by the central bank introduces a distortion into the economy. Monetary policy is about asset swaps. The central bank can print money but it can only inject that money into the private sector by swapping it for existing financial assets. It cannot add or subtract financial assets on net. That means that the central bank is a source of financial reallocation, and ultimately a source of the reallocation of real resources and wealth. 

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