A Conversation with Daniel Gross, author of Dumb Money
Q: With the government handing out a trillion dollars here and there, do you think we will head towards a Weimar-style hyperinflation scenario? How can we protect ourselves against inflation? DG: The short term -- i.e. the next couple of years -- I don't think we need to worry too much about inflation. A couple of years ago, when commodity and oil prices were booming, there was genuine fear of inflation -- and plenty of genuine inflation. And the way that came about really hammered home the notion that in today's economy, inflation is largely something that America imports. The high prices for oil, steel, soybeans, etc. were a function of soaring global demand. Well, it turns out that deflation is also something you can import. And while the U.S. entered recession in late 2007, much of the rest of the world is starting to slow down now. So while monetary policy in the U.S. might seem to be inflationary, the activity in the rest of the global economy -- China and India slowing down, Europe in recession, oil at $40 a barrel, slumping industrial production -- is counter-inflationary.
Q: What do you think Americans can invest in (monetarily, culturally, socially) during this period? What kind of world do you see when we get over this? DG: In a word: efficiency. That's something we can invest in monetarily, culturally, and socially. The Dumb Money period was one in which we could afford to be dumb about the use of assets -- credit, cash, energy. Now we've entered an era in which we have to make smarter use of everything. When your top line isn't growing, the only way to improve profits and operating income is by cutting the bottom line, by doing more with less. So instead of using a home equity line of credit to buy a new countertop, a homeowner would be smart to use what's left of it to buy an extra layer of insulation, which would lower energy costs this year -- and every year thereafter. I think we'll see a similar mentality in other sectors -- more videoconferencing instead of business travel, investments in digitizing health records. It's going to take a long time to dig out from under this. But if we manage to change some of our operating assumptions and permanently lower some recurring costs, our standard of living won't suffer so much.
Q: What is your opinion on the status of the U.S. dollar as the reserve currency of the world? Will our creditors (China, Japan...) trust us anymore? How should Americans prepare for this change? DG: I don't see any swift change in the status of the dollar as the world's reserve currency. What would replace it? The Euro? It's suffering, too. In addition, one of the consequences of this era of Dumb Money was that foreign governments, especially the Central Bank of China, acquired huge amounts of dollar-denominated assets like Treasury bonds. Even if they wanted to diversify aggressively, it would be difficult for them to do so. What's more, as we see emerging markets like India, Brazil, and Russia start to suffer, the dollar and the U.S. gain strength as a relative safe haven.
Q: DG: DG:There's always a degree to which we fight the last war when it comes to regulation. But clearly, letting the immense shadow-banking system -- investment banks, hedge funds, private equity -- operate with little regulation and virtually no capital requirements was a huge mistake. Had AIG, Bear, Stearns, and Lehman Brothers, been constrained from taking on huge amounts of debt, then their failures wouldn't have forced the taxpayers to get involved. More broadly, I think the Fed has to think about ways in which it can be less pro-cyclical -- in other words, it has to be a little more aggressive in taking away the punch bowl, even at the risk of tamping down a little growth.
Q: What other ways can an economy thrive besides being consumer-based? DG:We produce a lot of great goods and services that can be exported -- entertainment, brands, education, consulting, professional services. We should be investing more in those types of industries, and, above all, in higher education, so our workers are prepared to participate in them. And as I mentioned in one of the previous answers, an economy geared around the idea of efficiency is a promising one.
Q: We are always advised to "buy and hold;" it worked out well for our grandparents; now we're in a new world with new economic powers. The world is operating at warp speed, people are postponing retirement, and we've witnessed three major boom and busts in the past 20 years. Given so much uncertainty and volatility, do you buy and hold your investments? DG: I do, but I also have a pretty long time frame. I'm not planning on retiring for another 30 years or so, and my kids won't be starting college for nearly a decade. Buy and hold hasn't worked that well in the past ten years, it's true. But unless you want to become a trader, or try to develop superior stockpicking skills, I'm of the belief that it's very difficult to time the market. That said, I think people will be looking more to instruments like corporate bonds and municipal bonds, which offer steady guaranteed returns at rates that now look quite attractive compared with stocks.
Q: Why did you decide to release this as an eBook exclusive? DG:Three reasons. Speed. Speed. And Speed. This story has moved so fast, and it's very difficult to get your hands around. Traditional publishing, with its long lead times, thus works against any author. Say you got a contract last May to write a book about the epic fall of Bear, Stearns. By August, nobody cared about Bear, Stearns because much larger firms were failing. And by 2010, when the book about Bear would finally come out, the audience would have moved on. I felt like I had something original, useful, and timely to say about what we had all just lived through. And I wanted to get it out as soon as possible.
Q: Where is the smartest place to have your money these days? DG:Aside from your mattress? High quality municipal bonds, especially for people in higher tax brackets. Corporate bonds seem to be attractive, although you have to be careful to select companies that will be able to survive even if the economy at larges struggles for another year or two.
Q: What do you think of the Sony Reader and the future of electronic reading devices? DG: I'm very high on the Sony Reader and electronic reading devices. I'm a big believer in efficiency, and that there will be greater focus by consumers on ease, and long-term cost savings. For people who like to buy and read books, the Reader makes life much easier -- no lugging around heavy books with you. And the investment pays off relatively quickly in the form of lower prices.