In his latest market commentary, GMO’s Jeremy Grantham says the Federal Reserve has caused extensive damage to the economy by its manipulation of interest rates and asset prices, and is continuing to do so.

Grantham’s lengthy letter (it runs 16 pages) covers a variety of topics. A few highlights:

• He says that, contrary to popular belief, high debt levels do nothing to stimulate higher GDP growth rates. “In the real world, growth depends on real factors: the quality and quantity of education, work ethic, population profile, the quality and quantity of existing plant and equipment, business organization, the quality of public leadership … and the quality (not quantity) of existing regulations and the degree of enforcement,” he writes.
• Grantham says subsidized debt — debt at manipulated rates — “in contrast to normal debt at market clearing prices, has a large, profound, and dangerously distorting effect on market prices.”
• He’s still high on high-quality stocks, saying that investors should “emphasize U.S. quality companies, which are still cheap in an overpriced world.” He also says investors should “moderately overweight emerging market equities”, “heavily underweight” lower quality U.S. companies, and carry extra cash reserves for a “volatile market with insecure fundamentals”.