Jim Grant: What The Fed Calls Deflation Is Actually Progress

by Mark Thornton, Ludwig von Mises Institute

Jim Grant recently appeared on Yahoo Finance. He was critical of central bankers and economists who fear deflation and argue for unorthodox monetary policy to present deflation. He says that deflation is natural in a modern economy and that falling prices should not be feared and should be called progress.



"We have never had this kind of interest rate structure upon which is superimposed a federally sponsored rise in asset prices," says Jim Grant, author of the new book,"The Forgotten Depression" and editor of "Grant's Interest Rate Observer."

"One can't be too dogmatic about where these rates would be in the absence of these monetary exertions," warns Grant. But, he argues, deflation ought to be natural in a world where technology makes goods cheaper and easier to produce and if something becomes less expensive to create, the price of the good should also become less expensive. "The central bankers have been almost unanimous in declining to acknowledge that fact," says Grant. "They say they must restore some measure of inflation and want prices to rise by 2% a year or more."

Grant doesn't believe we're using the term deflation correctly. He categorizes it as a crisis of debt. It's important to distinguish between a credit crisis and a decline in cost due to technological progress, he says. "It's called 'everyday low prices' and Walmart (WMT) has seemed to made a good business out of it."

Suppressing these interest rates can cause future cash flows to become inflated and asset prices to become higher than they might otherwise be. "Central bank policy has served to inflate [assets] but we don't call it inflation, we call it a bull market," says Grant.

Grant believes that distorted interest rates distort production and that when rates do eventually go up "you're looking at some recalibration of asset values," certainly not a bull market.

Mark Thornton is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama, and is the book review editor for the Quarterly Journal of Austrian Economics. He is the author of The Economics of Prohibition, coauthor of Tariffs, Blockades, and Inflation: The Economics of the Civil War, and the editor of The Quotable Mises, The Bastiat Collection, and An Essay on Economic Theory.

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Moon Kil Woong 9 years ago Contributor's comment

Yes, artificially inflating assets does give a bigger push to the economy until they deflate. Likewise, directing it here may make inflation look tame, however, just like inflation it leads to some very nasty results including inevitable inflation, unsustainable debt, and mispricing of just about everything on spending due to credit generated from mispriced assets. The Federal Reserve should move to a communist country if they want to continue what they are doing. It doesn't belong in a market driven capitalist economy.