“Our company is thirty days from going out of business.” Every so often it’s useful to reference the previous quote. It’s real, and to this day can be found posted in the headquarters of Nvidia, presently one of the most valuable corporations in the world.
To those who don’t know, the quote is a reminder of what’s true: in its early days and years, Nvidia at times found itself staring bankruptcy in the face. A read of the various biographies of Elon Musk reveals much the same and his various businesses. Would it that perennial bear and scold James Grant would internalize truths like these. Instead, and to the detriment of his analysis of the economy and markets, Grant takes the Federal Reserve literally.
Consider a recent book review penned by Grant for the Wall Street Journal. In it, Grant wrote of how the authors (Byrne Hobart and Tobias Huber) of Boom “ably describe how artificial interest rates befuddle financial analysis.” Grant believes the Fed is the source of this befuddlement, but economic and business reality reveals something quite different: see Nvidia, see Musk’s various companies largely formed in a 21st century allegedly defined by “artificial interest rates,” see every startup seeded in the 21st century.
To say that all of them were financed with equity amounts to a blinding glimpse of the obvious. And the reason they could only attract incredibly-difficult-to-attain equity finance can be found in the basic truth that debt finance is exponentially more difficult to attain than equity finance. Put more bluntly, there’s not even a five-figure number high enough to place on an interest rate sufficient to compensate a loan made to a startup, or even a post-startup company trying to make it to acquisition stage, IPO stage, or both. Which is a long or short way of saying that the “artificially low rates” from the Fed that keep Grant up at night have very little relevance to the vast majority of individuals and businesses that populate what we call the “U.S. economy.” Said more succinctly, if your economic mind is on the Fed then it’s wandering quite aimlessly.
The problem is that Grant doesn’t stop at the Fed. In the aforementioned review he asks “What is a bubble?” Grant’s own answer is that a “bubble” is “a collective delusion.” Which requires a pause. In markets of all kinds, there are no “collective delusions.” By definition, bulls and bears populate all markets. For Grant’s happy opposite to express that happiness (or “delusion”) in the marketplace through a purchase of some kind, there must be Grant equivalents eager to sell a future that they consider dim. Precisely because markets are populated by buyers and sellers, there’s always pessimism to match the optimism that Grant finds so ghastly.
Only for Grant to persist with his own delusions whereby he claims the “bubbles” that cause him so much angst are “often instigated by excessive credit creation.” Except that there’s no such thing. In pretending there is, the would-be Austrian in Grant is morphing into Keynes whereby he imagines governments can increase credit by decree. No, they can’t. Just as governments can only spend insofar as they extract precious resources from the private sector that must get by with less consumptive power, they can similarly only offer credit insofar as there’s less to be allocated in market-driven fashion by the private sector. Lest Grant or anyone forget, and per Ludwig von Mises himself, we borrow money for what it can be exchanged for.
It’s just a gentle reminder that “credit” is a reflection of production. Always. For it to be what Grant imagines it to be whereby governments “excessively” create it, is for Grant and those who follow him to imagine impressive market stupidity such that actual economic actors in need of credit borrow “money” that has exchangeable value for…nothing.
What Grant imagines in his focus on “artificially low interest rates” is the same as “rent control,” albeit for every good and service in the economy. The problem is that price controls fail, always and everywhere. Grant’s mind is wandering.
