NEW YORK (Reuters) - Central banks have been so focused on force-feeding financial markets with cash that they've overlooked a brewing inflation crisis, said Jim Grant, editor of Grant's Interest Rate Observer, on Wednesday.
Amid a global credit crunch, liquidity has reached buzz word status in financial markets and among monetary policy officials, so that the implications of adding so much money to the system has been largely ignored.
"The word liquidity is a phony word that sounds sophisticated," Grant told the Reuters Investment 2008 Outlook Summit. "It clearly means money, money that is being materialized out of thin air through the actions of central banks."
A group of major central banks, including the Federal Reserve, joined forces on Wednesday to make it easier for banks to borrow money in an effort to loosen up credit markets. As part of the plan, the Fed said it would hold two auctions through a new funding facility of $20 billion each.
Grant was skeptical the plan would work smoothly.
"The risk is that by intervening to facilitate transactions to prevent so-called fire sales, the central banks of the world are actually not so surreptitiously inflating the global money supply in order to lift all asset values, including the ones that are most dubious," he said.
Besides the latest central bank move though, Grant said the practice of some central banks, namely China's, of filling their foreign exchange reserves with dollars in order to keep their own respective currencies weaker has put massive upward pressure on prices.
"That's the way the system works, and it's hugely inflationary," Grant said.
This kind of inflation has been showing up in government numbers as well. Inflation in Saudi Arabia in October was the highest since at least 1995, with the government raising subsidies to curb discontent over prices and the central bank facing more pressure to cut rates to defend a dollar peg.
The same kind of story is seen in China, where inflation in the 12 months to November shot to an 11-year high.
"The system of printing money with which to buy dollars is entering a time of crisis, and it's an inflationary crisis," he said.
(For summit blog: summitnotebook.reuters.com/)
(Editing by Leslie Adler)
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