jim grant pictureConsuelo Mack WealthTrack – August 12, 2011

Financial Thought Leader James Grant explains why he believes the Federal Reserve’s easy money policies will wreak havoc on the economy and markets. The dangers of inflation creep and how to protect yourself against it are the focus of this week’s Consuelo Mack WealthTrack.

CONSUELO MACK: This week on WealthTrack, while Federal Reserve Chairman Ben Bernanke reassures us that “inflation is not a problem,” our Financial Thought Leader guest strenuously disagrees. Author, historian, columnist and contrary-minded editor of Grant’s Interest Rate Observer, Jim Grant, on why even a little inflation is a dangerous thing, next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. Federal Reserve Bank Chairman Ben Bernanke has told us on numerous occasions that we need not worry about inflation and that he views recent increases in commodity prices as “transitory,” and predicts they will “eventually stabilize.” As far as most of us are concerned, stabilization, if not reversal can’t come soon enough. Just about everywhere you look, the cost of basics- food, energy, medical and rent- are going up. Those headlines about record highs being set in commodity prices including wheat, corn and cotton and accelerating prices of oil and gas are hitting home. Gasoline prices at the pump have surged more than a dollar a gallon over the past seven months.
Then there is the purchasing power of our currency. As you can see from this chart, provided to us by crack technical market analyst Louise Yamada, the dollar has been in a two year decline versus the currencies of its major trading partners. Yamada expects the value of the dollar to continue to weaken. But what about the broad measures of inflation? What are they showing? Depends upon which one you look at. The chart we are about to show you comes to us courtesy of this week’s Financial Thought Leader guest. He is James Grant, editor of Grant’s Interest Rate Observer, a self-described “independent, value oriented and contrary minded journal of the financial markets.” It also happens to be a must read among top professional investors. This chart, which Grant titles “Inflation Webcast” compares the government issued consumer price index, which as you can see has been rising gradually since early 2009, to what’s called the “Billion Prices Daily Online Price Index,” a real-time index created by two MIT professors. As Grant’s reported, web-monitored prices jumped by 3.2% over the 365 days ended April 4th, considerably higher than the government’s 2.1% rise in the CPI over the 12 months ended in February. And according to MIT, inflation has picked up considerably over the last six months.
But what really sticks in Grant’s craw is that the Federal Reserve feels that 2% inflation is not only acceptable, but desirable. Au contraire says Grant, who says what he calls inflation creep is downright dangerous. I asked him why.

JIM GRANT: Well, yesteryear, not so long ago, in the ‘50s and ’60s- that is 1950s and ‘60s- there was a little fashion for the idea of just a little bit of inflation, 2 or 3%, some of these theorists thought, would be just what we needed. It would impart a lilt to our economy; it would make everyone feel a little bit more prosperous. You get up the morning with a little spring in your step because everything was getting higher, and this was called “creeping inflation”, and some of the advocates were of most learned segment of the provisorial class.
So this idea gained wide circulation, and no little credence, but it was met tellingly by the most orthodox central bankers as rank heresy. As a fellow of the Atlanta Federal Reserve, in fact, the president of that regional Federal Reserve Bank named Malcolm Bryan, and Malcolm Bryan regarded the premeditated creation of inflation by the Fed as an act of moral affront. It was a sin in his view, and he spoke in terms of… he spoke it with almost an evangelical fervor against it. So fast forward to the present day, which is not so far forward in the scheme of time, and creeping inflation by another name has been instituted as official policy. We call it “inflation targeting”. Monetary masters seek 2% a year, which in their self-delusion, they think they can deliver.

CONSUELO MACK: So what is wrong with a little inflation, and especially given the fact that we’ve just gone through a period of financial crisis, as a matter of fact, where inflation– there were eight consecutive months at one point of declining prices, and if the Fed’s, one of the Fed’s primary mandates is price stability, if, in fact, prices are declining, don’t you want to goose the pump a little bit, or prime the pump, and actually get prices so they’re relatively stable?

JIM GRANT: Well, I think one thing to ask is what do we mean, or what should we mean by this phrase “price stability”, which is so often heard and glibly spoken? And let us suppose that the modern world has delivered a kind of cornucopia, that with the addition of 200 or so million willing new hands in one country in Asia, and another couple of hundred willing, new eager hands, another country that the world’s labor force expands, that digital technology further makes us productive, and that the world supply curve, as the economists say, shifts benignly, that is to say at a given level of prices, there is more stuff for sale. More things more cheaply priced is, in fact, what you find when you walk into Costco or Wal-Mart. I’m astounded at the sheer volume of merchandise and its accessibility. So that’s one observation.
So that’s every-day low prices, right? It’s every day low and lower prices. Explain again, Mr. Fed, what’s wrong with that, is what many Americans spend all weekend looking for, right? And we are meant to understand our Fed, experts tell us, that this is somehow dangerous. So I would ask us all to reconsider if stable prices in a time of rising productivity growth and of profound historic expansion of the world’s productive apparatus, if stable prices ought not to mean Wal-Mart kind of every-day low and lower prices. So I think the Fed I think does not believe that. So to give us stable prices, it would have to create more credit to compensate for the Wal-Mart effect in retail, right? So it’s creating the dollars with which to lift the price level from what it would otherwise be, and in so lifting, it affects a widespread distortion of prices and structures in the economy.

CONSUELO MACK: But Jim, the other side of that Walmartization of consumer prices, and I can see that is considered to be a good thing, the other side of that is the Walmartization of wages. Address the issue of wage deflation.

JIM GRANT: It’s hard to find good work at a good wage, and a lot of people in this country are hurting, and it will be of little or no comfort then to know that their lot has frequently been the lot of people in a time of great economic and technological upheaval.  Late in

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