News Flash: The Internet Is Massively Deflationary – Forbes

James Bullard, the president of the St. Louis Fed, said today that even if unemployment went to 3% it would have little impact on the current low inflation environment. That’s quite a statement. And with that, he argued no need to do anything with rates at this stage.

And he said the low growth environment seems to be well intact too–even though we well exceeded the target the Fed put on employment years ago. In the Bernanke Fed, they slapped a target on unemployment at 6.5% back in 2012, which, if reached, they said they would start removing accommodation, including raising rates. The assumption was that the recovery in jobs to that point would stoke inflation to the point it would warrant normalization policy. Yet, here we are in the mid-4%s on unemployment and the Fed’s favored inflation gauge has not only fallen short of its 2% target, it’s trending the other way (lower).

As I’ve said before, what gets little attention in this “lack of inflation” confoundment, is the impact of the internet. With the internet has come transparency, low barriers-to-entry into businesses (and therefore increased competition), and reduced overhead. And with that, I’ve always thought the internet to be massively deflationary. When you can stand in a store and make a salesman compete on best price anywhere in the country–if not world–prices go down.

And this internet 2.0 phase has been all about attacking industries that have been built upon overcharging and underdelivering to consumers. The power is shifting to the consumer and it’s resulting in cheaper stuff and cheaper services. And we’re just in the early stages of the proliferation of consumer to consumer (C2C) business–where neighbors are selling products and services to other neighbors, swapping or just giving things away. It all extracts demand from the mainstream business and forces them to compete on price and improve service. So we get lower inflation. But maybe the most misunderstood piece is how it all impacts GDP. Is it all being accounted for, or is it possible that we’re in a world with better growth than the numbers would suggest, yet accompanied by very low inflation?

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