'Black Friday' Entertainingly Mocks a Confused Federal Reserve

'Black Friday' Entertainingly Mocks a Confused Federal Reserve
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That economic growth is the natural state for humans is a statement of the obvious.  We want things, so we produce in order to get them.  And because our desires are limitless, we’re constantly devising ways to enhance our productivity so that our work can be exchanged for more.  Life is simple.  So is economic growth. 

The problem is that what’s blindingly easy actually confuses the simple minds at the Federal Reserve.  Its leading lights quite literally believe that economic growth causes inflation.  The feeling among economists at the central bank is that economic growth drives demand that outstrips supply, thus leading to higher prices.  Readers needn’t worry.  Ben Bernanke was confused, so is Janet Yellen, and so will be Jerome Powell.  Thank goodness the Fed is largely irrelevant to the direction of the economy. 

The above sentence isn’t a misprint.  The Fed’s just not that important despite what economists, politicians and pundits think.  That which projects its always overstated influence through antiquated and hyper-regulated banks can’t much impact a dynamic economy decidedly not reliant on stodgy banks.  Still, it’s always a worthwhile exercise to address the kind of thinking that passes for logic inside the monument to illogic that is the Fed.  The Fed instructs, through its confusion. 

For one, demand can never outstrip supply.  It can’t because supply is the source of all demand.  Our production represents our demand.  That’s one of many reasons why economic growth doesn’t result in rising prices.  It doesn’t simply because increased demand signals increased supply. 

Furthermore, economic growth is an effect of investment.  Always.  And logically so.  An economy grows thanks to the enterprising being matched with capital such that their productivity increases.  Reducing this to the basics, a farmer who only has a shovel won’t be able to produce very much.  But if backed by capital such that the shoveling can be augmented by a gasoline-powered tractor, suddenly this farmer is producing a great deal more.  The addition of the tractor is an effect of savings and investment, and it renders the farmer exponentially more productive.

Fast forward to modern times, those in the Fed’s employ quite literally believe that “too much” economic growth is once again a driver of inflation.  As they see it, too much economic growth causes economies to “overheat.” Their reasoning is backwards. It is because economic growth is merely a euphemism for increased productivity wrought by investment.  With increased productivity we’re able to produce more with less in the way of effort. 

Let’s apply the above to the flat screen televisions that are flying off retailer shelves, and that in particular will be sold en masse today, Black Friday.  If Fed theories are true, flat-screen televisions have become more expensive over the past few years in response to rising economic growth.  As previously mentioned, Fed economic models indicate that growth drives up consumer prices.  But it doesn’t, and for obvious reasons.

Economic growth is yet again an effect of investment; investment that enhances our ability to produce a great deal more with less.  Consider the first 4K Ultra High Definition tvs.  USA Today recently reported that the original models marketed in the U.S. in 2012 set consumers back $20,000.  In 2013, the prices of these most advanced tvs had fallen to $7,000.  In 2017 on Black Friday? Shoppers at Best Buy will be able to purchase a Sharp, 50” 4K television (Roku included) for $180. 

What’s crucial here is that falling prices are the norm in a growing economy despite what Fed officials believe.  That’s why readers should loudly mock Fed conceit that it can and should use its toothless interest rate targets to “slam the brakes” on economic growth in order to “keep inflation in check.” Even if the Fed could "manage" the economy with its rate targeting, such a view would still be backwards.  Investment drives productivity growth which is economic growth, and the result is falling prices.  The paradoxical truth is that we’ll know the economy isn’t growing as quickly when prices aren’t falling as quickly; all of this directly contradicting Fed models that are near totally divorced from reality.  But wait, it gets sillier.

You see, falling prices terrify the Federal Reserve.  Its economists believe that the falling prices which powerfully signal economic growth are actually a sign of stagnation.  So while we individuals who comprise the economy logically cheer cheaper goods, the Fed fears that falling prices will cause us to consume less.  Who cares that unspent wealth and the resulting investment are what drive economic growth, and who cares that no act of saving (short of stuffing money under a mattress) ever subtracts from demand, Fed officials think falling prices will deter consumption.  Except that they don’t. 

There’s endless evidence supporting the above claim, but the easiest is Apple.  When it introduced the first iPhone to great acclaim, any mildly sentient human being knew that there would be many versions of the phone in the future; versions that would be sleeker, faster, and most definitely cheaper.  Such is the genius of economic growth.  Investment is always and everywhere pushing down the price of everything.  Despite this, demand for the original iPhones was monstrous even though subsequent versions have rendered the first rather dated.  Flat-screens and iPhones make Fed officials look silly. 

Which brings us to the iPhone X.  Fed officials once again believe that falling prices are economically harmful because they cause delays in consumption.  Who cares that the latter is utter nonsense, but Apple’s iPhone X further ridicules the Fed’s thinking.  We know this because sales of the cheaper iPhone 8 were apparently slower than normal based on consumer anticipation of the X’s arrival.  Wait a second! The Fed tells us falling prices cause consumption to be delayed, but a more expensive Apple smartphone that was released after the cheaper 8 is what apparently reduced demand for the 8? How do the Fed’s models explain this? Can they?

The correct answer is to not care, and to ignore a central bank that’s long been important, and that will soon enough be commonly seen as irrelevant.  How can any sane human being take seriously an entity populated by individuals who believe so much of what plainly isn’t true? For now the Fed instructs through its delusions. Shoppers will see today why the Fed is not only irrelevant, but also staffed by the eerily confused and deluded. 

John Tamny is a speechwriter and writer of opinion pieces for clients, he's editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). His new book is The End of Work, about the exciting explosion of remunerative jobs that don't feel at all like work.  He's also the author of Who Needs the Fed? and Popular Economics. He can be reached at jtamny@realclearmarkets.com.  

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