Adam Smith, Grains, Silver, the PPI, and Deflation

For months, if not years, Federal Reserve officials have been harping on the absence of inflation during their era of unrelenting quantitative easing (money printing). This phenomenon has baffled the pointed heads of the Fed, since it would be only natural for prices to rise with the advent of scads of fresh money hitting the market.

The problem for the Fed is simple. Their transmission lines have been blunted for the past eight years, with their easy money stopped at the bank level, never actually reaching commercial or consumer participants in the general economy. Thus, stocks, bonds and various currencies have experienced outsize gains - those assets experiencing above average appreciation, i.e., inflation - while the more mundane elements of the vast economic landscape have wallowed in a regime of low inflation, disinflation or outright deflation.

As the Fed prepares to sell off assets from its enormous ($4.4 trillion) balance sheet, the matter of price inflation has once again become a major concern. Fed officials disingenuously mutter on and about wage growth, seeking to convey the impression that they are somehow concerned for the welfare of workers (labor). Wage growth, which has stagnated since the year 1999 if not earlier, is a false argument for inflation. what the Fed wants is price inflation for everyday goods, commercial mid-production products, and base goods.

It's not happening.

In his magnificent tome, "The Wealth of Nations," author Adam Smith takes pains - and many pages - in discussion of nominal prices, concerning himself in his writings with the price of corn. Scholars rightfully insist that Smaith's intention was to show how prices in base goods are more important a measurement of economic health than pricing in currency.

With that knowledge, variations in currencies and base grains - wheat, corn, rice - can serve as an impressive measurement of real inflation, since the cost of producing marketable grain from hectares of farm land is somewhat non-variable, considering that the labor and fuel costs are relatively static.

In other words, since farmers are paying their hired hands roughly the same wage and the cost of operating the machinery to harvest the grains is also somewhat static, the price of finished grain in terms of currencies of choice - in his case, silver, can determine whether the environment is inflationary, deflationary, or neutral.

This morning's release of PPI data showed an increase of 0.4% month-over-month and a rate of 2.6% year-over-year. The increase puts the PPI at a level last seen in 2012. CPI (Consumer Price Index) remains mired in mediocrity, at a rate of 1.9% annually. That is the final inflation number, though it is hardly a reliable one.

Since the US economy is so vast and dynamic, it's difficult to get a grip on the overall flow of anything, though it's fairly certain that the inflation rate is higher than what the government is reporting.

On the other hand, taking into account Adam Smith's famous measurements, grains - the basis for much of what Americans and animals of husbandry eat - have crashed in recent weeks and months, along with silver, which has been rangebound for the past four years and is thus a benign measurement, useful in actual discussions of nominal prices.

On that basis, the Fed is likely to be disappointed in their inflation expectations. Since their data is so badly maligned, it cannot be trusted, while Adam Smith's has stood the tests of time.

It's deflation, as far as the eye can see, no matter what the Federal Reserve officials - who have proven, time and again, to be nothing more than dunces with degrees - try to squeeze out of the economy. The deflation is especially evident considering the levels of price suppression in silver. Were silver to rise to somewhat more realistic levels, the cost of buying a bushel or wheat or corn or rice would fall substantially.

Stocks made new all-time highs on Wednesday, but are pulling back in early trading Thursday morning.