Is inflation transitory pt2 - let's ask James Grant

15 Apr 2011 WealthTrack

[Presenter: Is 2% inflation desirable?]

James Grant --
"No, inflation is undesirable. There was a fashion for a little bit of inflation since the 1950s and 1960s. 2 or 3 per cent would make everybody feel a bit more prosperous because everything was going higher. This idea gained widespread acceptance and came to be known as creeping inflation. Creeping inflation has been instituted as official policy, we call it inflation targeting. Our monetary masters today at the central bank now target 2% a year which in their self-delusion they think they can deliver.
The premeditated creation of inflation by the Fed is a sin.

What is price stability? Let us suppose that the modern world adds 200 million new hands and digital technology makes us more productive. At a given level of prices there is more stuff for sale. More things more cheaply priced is what you find. So prices should fall. Why is the Fed so scared [of falling prices]? It's what many Americans are looking for. So I would ask the Fed to reconsider why this is dangerous in a time of rising productivity growth and the world's apparatus. To give us stable prices the Fed has to give us more credit. But this creates a widespread distortion of prices.

We have socialized risk. We have privatized gain. Savers get zero and the speculative classes get to borrow.
My expectation of inflation is that there will be a lot of it suddenly. Certainly it can't be supported forever. Cash yields zero. It's impossible not to participate in the market!"


[James Grant shows a solid understanding on monetary affairs, inflation and price stability. He delivers a devastating critique on inflation targeting, possibly the biggest failure of central bank policy in many years. It could be a complete theory apart from one missing link - he seems less confident when challenged about wage deflation. Ultimately it is here that the Fed's modelling approach will still win. This is because of globalization and free market capital flows as it relates to bank capital. Very few people can understand why this is the case.]

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