Jeremy Grantham, co-founder of GMO, called out the Fed for interfering with the economic recovery in an interview with Fortune published on Monday.
Grantham acknowledged that his critique is based on anecdotal evidence, but he pointed to debt growth since the 1980s. Back then, “the U.S. had an aggregate debt level of about 1.3 times GDP,” he said. “Then we had a massive spike over the next two decades to about 3.3 times debt.”
Over that time, GDP has slowed, Grantham told Fortune. “There isn’t any room in that data for the belief that more debt creates growth.”
For more evidence that the Fed’s intervention has done more harm than good, Grantham suggested looking at the economy following World War I. Without intervention or bailouts, “the economy came roaring back” from that crisis.
Even if this anecdotal evidence doesn’t prove that the Fed’s intervention has been harmful, “there’s no proof” it’s been helpful either, Grantham said. Although “there’s some indication that the crash would have been worse and the downturn would have been sharper,” Grantham said that those negative outcomes would have been “forgotten” by now, with a stronger economy and better growth to boot.
One thing the Fed has done, Grantham said, is manipulate stock prices, but he questioned whether it was worthwhile. “Why would you want to get an advantage from the wealth effect when you know you are going to have to give it all back when the Fed reverses course?”
Grantham said he expects negative returns from the stock market over the next seven years. “The next bust will be unlike any other, because the Fed and other central banks around the world have taken on all this leverage that was out there and put it on their balance sheets,” he said. “We have never had this before. Assets are overpriced generally. They will be cheap again. That’s how we will pay for this. It’s going to be very painful for investors.”