The Fed Doesn’t Get Digital

The Wall Street Journal’s David Wessell recently talked to NPR about the Fed’s view of inflation.

We have unemployment at a 16-year low. And the inflation rate has actually been coming down, not up. So that’s both a surprise, and it’s become a worry at the Federal Reserve.

I have been thinking that the folks at the Fed who keep worrying about inflation around the corner as we get to 4% unemployment basically don’t understand the nature of the digital economy which is coming in to almost every business. Digitization is basically deflationary. Here is the reality of inflation.

Moore’s Law says you will be able to do more for less money every year. In the media economy, more content is offered for free. The sharing economy is totally deflationary. Why should I buy a car, when I can use Uber? Amazon is so powerful, it constantly forces producers to lower prices. And many retail businesses are totally dependent on constant sales promotions and the kind of Groupon coupon economy that feeds the “Locust Economy”.

It isn’t the 1% fat cats who are becoming victims of the new economy. It is the little capitalist in the middle. The brave little Jeffersonian middle class capitalist who could…Hotels, taxis, education, music, publishing, restaurants. The list of locust-devastated/soon-to-be-devastated industries is growing longer every day. I suspect the locust economy is now bigger than California’s economy.

To me this means that bonds may be a better store of value than the conventional wisdom believes. The Fed will keep looking for inflation clues, but they will never show up.

And because inflation never shows up, we have epic wage stagnation.

But there is one other aspect of the Digital Revolution that may be contributing to this stagnation. The averge 27 year old worker spends two hours per working day on social media. I am pretty sure this is contribution to the epic productivity slowdown evident in this chart.

All of this tells me that our basic forcasting models are deeply flawed. Digital deflation may be the new normal.