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James Grant is an engaging writer and a wise market historian, though his personal moral abhorence of debt in all its forms makes him a perma-bear in our debt-fueled world. He earns his living forecasting interest rates (always higher, it seems -- all that debt, you see). Yet in this morning's Wall Street Journal he trashes the rate forecasting industry:

You will scan the Forbes 400 in vain for the names of the captains of the interest-rate forecasting industry. The omission speaks volumes. Just answering correctly the simple question "up" or "down" over a couple of moderately volatile years in the financial-futures markets would put a successful forecaster in the way of untold wealth. Yet, try as they might, the economists can't seem to get fabulously rich.

But I knew that by the time I got to the end of the article, there I would find -- wait, no... let's write that as Grant would. You will scan his article in vain for abstinence from forecasting (that's more like it). The failure of omission speaks volumes. As usual, it's "higher" -- and as usual, it's draped in a history lesson:

Interest rates are low, and the premium of risky rates to government rates is tight. True, long-dated U.S. government bond rates have been much lower than they are today. Since 1870, in fact, they have averaged just 3.5%. But up until 1914, there was no Federal Reserve. In that halcyon time, prices tended to fall in peacetime and rise in wartime (or when new gold discoveries augmented the world's monetary base, as they did after 1900). Since the institution of the Fed, inflation has been the rule, in peace as in war. And since 1971, when the dollar was cut loose from the last frayed hawsers of the gold standard, long-term Treasury yields have averaged 8%, a sizable premium to today's 4.76%.

Now whatever I may think of Grant, fact is I happen to agree with him right now that rates are going higher -- and for just the reason cited in his little history lesson. It's not about the mountains of illicit debt in world. It's about inflation, and about inflation's source: the Fed.

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