Amazon's Genius Mocks the Fed and Its 2% Inflation Target

Amazon’s purchase of high-end grocery retailer Whole Foods was approved last week.  That the federal government had any role at all in the combination of two private companies is on its own an offense to common sense. Government barriers erected to mergers trample on property rights, restrain economic progress for crucial information about the good or bad of tie-ups needlessly reaching markets late, plus readers must consider the unseen: the economic activity not taking place thanks to the forced duplication of effort that is an effect of antitrust. 

But this is a column about the Federal Reserve, and the alleged price-level implications of the Amazon/Whole Foods tie-up.  Sometimes commentary is remarkable for its absurdity, and that was certainly the case last week. 

With approval of the merger having been given, Amazon quickly announced that shoppers would soon see reduced prices at Whole Foods.  Good news? Actually, news like this should be put in the wonderful category. Our work is all about the getting.  Thanks to innovators like Amazon, we’re able to get more and more in return for our work.  All is well? Not really, if an impressively obtuse post from Bloomberg is to be believed.

Responding to Amazon’s announcement of price cuts, a reporter at the news site attempted to pour a little bit of cold water on the approved merger, writing:

“Amazon’s plans to cut prices at Whole Foods is great news for shoppers, but not so much for Federal Reserve officials wondering whether they’ll ever hit their 2 percent inflation target.”

Wow! While media understanding of economics has long been embarrassingly bad, this post surely raised the bar. 

Assuming the Fed could manage prices in the first place (it can’t), it’s surely not the job of businesses to compete less aggressively, and for consumers to attain less in return for their work, just so the Fed can achieve its witless targets.  Only among Fed economists untouched by reality (enabled by economics journalists equally unfamiliar with reason) could rising prices for consumer goods amount to a desirable outcome.

Back in the real world, falling prices are the historical norm within advanced economies thanks to investors constantly rewarding businesses that commoditize existing luxuries.  Whether it’s a ball-point pen, car or computer, all that we value in life today was once very expensive and obscure.  But thanks to aggressive entrepreneurs and businesses feverishly competing to serve our needs, what’s expensive and desirable is eventually rendered affordable.  Along these lines, readers can rest assured that flight on private jets will soon enough be common, and by extension a former luxury. 

Also back in the real world, it’s a known quantity that prices are the way that a market economy organizes itself.  Absent price signals, entrepreneurs and businesses would not know what to make more and less of.  If readers are looking for actual examples of what life’s like in societies where the supposedly wise plan prices as the Fed would like to, they need only read historical accounts of the old Soviet Union. While the latter is surely an extreme example, it’s a reminder that even if the Fed could manage prices as its economists and media enablers assume it can, this would not be a good thing.  For prices to properly inform producers, they must be arrived at naturally, and free of meddling.  The good news here is that a Fed laughably presuming to influence what is dynamic and large bases said influence on its dealings with anachronistic banks that are shrinking by the day as sources of credit. Which means the Fed isn’t influencing much of anything.  The Fed couldn’t engineer a 2% inflation rate even if it were actually staffed by the competent. 

Back to reality, not only are rising prices undesirable, they’re also an indicator of the opposite of economic growth despite the musings of the Fed’s well meaning, but witless planners.  Why is the latter true? It’s simple:  Falling prices spring from investment in new production techniques that generate much more at lower costs.  It’s called productivity.  An economy is growing when productivity is, and the latter is an indicator of falling prices. 

Which brings us back to the unreal world in which the Fed resides.  It yearns for 2% price level increases based on its worship of consumption as the driver of economic growth.  The belief is that if prices are constantly rising, people will consume with abandon to avoid higher prices down the line.  And if prices are falling, people won’t consume on the assumption of lower prices down the line.  Ok, but prices of nearly every desirable market good are generally always falling, yet individuals still buy them in the near term.  Stating the obvious, consumption is the easy part.  We’re producing so that we can consume.

Furthermore, the Fed’s desire for 2% price-level increases reveals how little its drones understand economic growth to begin with.  Indeed, assuming voracious consumption to capture goods ahead of falling prices, the economic result would not be a good one.  It wouldn’t be because savings and investment are the ultimate economic stimulant.  They are because as has already been discussed, investment is the driver of constantly falling prices.  Absent the commitment of capital to production enhancements, prices can’t fall. 

And when prices are rigid, fewer people benefit from the introduction of goods and services.  Much worse, when prices are rigid there’s very little progress.  That the computers, cellphones, and laser printers of today cost a microscopic fraction of what they did when they originally reached the market is important with progress in mind.  That the prices of each good have plummeted over the years thanks to feverish investment in their production has freed up workers to direct the fruits of their labor to all manner of new goods and services previously unattainable.  Such is the genius of falling prices: they logically expand our living standards thanks to our paychecks commanding more and more in the marketplace.  And with every falling price we’re able to direct our wants to the previously unattainable. 

Yet to the Fed and its hopeless media enablers, falling prices are a bad thing.  Amazon’s acquisition of Whole Foods is problematic because the Fed’s explicit efforts to engineer lower living standards will be compromised.  It’s hard to know whether to laugh or cry. 

Probably the wisest thing to do is rejoice.  That the Fed believes what is plainly ridiculous is a certain sign that its influence over the U.S. economy isn’t that great.  If the Fed were powerful, the sheer stupidity of the thinking that informs its economists tells us that economic growth would be the rare exception to the stagnation rule. 

That we continue to prosper, that innovators like Amazon continue to push down prices, is a certain sign that the Fed’s relevance is vastly overstated.  And it always has been overstated as the historical U.S. growth patterns reveal in bright, happy colors. 

So while Amazon’s genius has further exposed the Fed’s 2% target as mindless, the good news is that the central bank is just not that relevant.  Just as we’ll soon enough be flying privately, so will the Fed’s happy irrelevance soon enough be a widely accepted truth.