I keep reading about how the Fed is watching inflation as a sign to increase rates. We've had no sign of increased inflation and yet the Fed has continued to raise rates.
It's no secret that the Fed is confused, but they do seem to be leaving out some important considerations in monthly discussions. Seeking Alpha writers have done a good job covering the issue.
Seeking Alpha Literary Review: Inflation In A New Regime
In a world of global competition and new technology, I think competition is coming from new places. New partners are choosing to merge and sort of changing the marketplace and [bringing] more competitive pressures on price margins…If that's the case, and I think that's just speculative at this point, then it means that we need even more accommodation to get inflation up.
I could not agree with this assessment more. We are in a new paradigm and very few people at the Fed are talking about how this new paradigm of competition and technology impacts inflation, money supply and employment.
James Picerno adds another angle to the discussion in the article Fed Officials Offer Mixed Outlook On U.S. Inflation. In it, Picerno discusses the impact of technology on inflation as a structural (rather than cyclical) change.
Value/Fundamental Investor does a great job of explaining what exactly this "structural change" is in the article What Is Killing Inflation? S/He does so in plain language, which is necessary at this point because the models aren't working. Still, I've seen very little discussion about the impact of cryptocurrency on inflation.
To get a better understanding of the impact of cryptocurrency on the money supply, imagine that all the bitcoins out there were suddenly converted to dollars. It would add a great deal to the money supply. It would also increase government revenue because those dollars are tracked. Prices would be higher because there aren't alternative forms of money that people can use to supplement income. At the very least, bitcoin is a hedge against inflation. If that's the case, then what does its current value say about the value of the dollar?
I don't blame anyone for not tackling these issues all at once - I can barely get my head around all the moving parts. Here's a quick list of the moving parts I'm referring to for clarity because I want to make sure we're on the same page:
- The market is at an all-time high.
- Corruption is at an all-time high (this is a proven economic phenomena, which drives markets up).
- Cryptocurrencies are gaining in value and aren't benched ag world currencies.
- The volatility of dollars is slowing.
- Volatility is at an all-time low (due to corporate profits and stock buybacks funded by free money from the central bank).
- The Internet is the most disruptive technology known to man (except for the ability to create fire).
- For the first time in history, banks are getting paid interest on the $2.2 trillion sitting in reserves at the Fed (IOER) and there are no signs that the Fed is winding down that balance sheet even though it claims to be in the process of doing so.
The issue is that purchasing power is real, but reserves aren't. Lower prices are real, but higher stock prices on the back of 0% corporate debt and stock buybacks is not. Cryptocurrencies may not be real to some, but the products and services you can buy with them is real - and so are the 0% taxes paid on top of NO regulation from any central bank. If you're in Venezuela or a country with high inflation (read: Zimbabwe), mining cryptocurrencies can be a highly profitable venture. This is due to the link between cryptocurrency mining profitability and energy prices.
So while the Wizard of Oz (aka The Fed) is busy at work behind the curtain, what you really have is the illusion of profits and a roaring market on the back of unlimited debt. Meanwhile, prices are trending down.
What does it all mean?
1) As I predicted, it means banks are having a great year. What more can I say? I was right.
2) It means we have access to much more for much less, which has increased aggregate buying power - we may not be able to prove that humanity is progressive, but we can certainly claim to have the most knowledge. People have access to an unprecedented level of information and that information used to be paid for. You don't need a AAA Travel service when you can go online and book your reservation. You don't need to ask your vet how to take care of baby ducks when there are 100+ videos titled "How to take care of your baby ducks" on YouTube.
You don't need a GPS, a calendar, a concierge, an alarm clock, a music player, a watch and an unlimited number of diagnostic and troubleshooting systems for everything from your phone to your car. These are all dollars back in our pockets and out of the pockets of those that used to provide the service.)
3) It means corporations are replacing people with software - Fintech and business office solutions are started every day. These services can almost eliminate the need for certain functional areas like accounts receivable and accounts payable. One of my clients (Apruve.com) has a solution for wholesalers that eliminates the need to carry receivables altogether.
It simultaneously offers the customer access to their own line of credit, which increases sales. The transaction is completely automated and has the ability to transform a company's business model. Apruve is not unique. There are solutions available for every industry and for every function - business and financial administration have officially been sent to the cloud.
We are in uncharted territory. That said, we can still look at these pressures from a macro level. (I know many of you need a model to break a model, but have faith. To date, no model exists for the current economic paradigm anyway.) In a nutshell, what's happening is that consumers have the perception of more money through Internet cost savings. As a result, goods are being sold for cheaper and cheaper.
As a reminder, according to Investopedia, inflation is:
... the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.
This is the exact opposite of what's going on. Cryptocurrencies further compound the issue by increasing purchasing power. This brings me to the reason for the article. I'm hoping to begin a larger discussion here. Specifically,
- What do you think the impact of technology (Internet) and cryptocurrencies (Bitcoin) have on inflation in a post-IOER, quantitative easing, free-debt for stock buybacks, bull-market world.
- What impact do all of these inputs have on economic stability and what does it say that the VIX is trading at its lowest levels in years?
What do I think is going on? Real Talk?:
Well, I think the Fed got lucky. The current low inflation isn't due to lower cellular phone prices as CEO Fed Chair Dudley surmises,
While some of this year’s shortfall can be explained by one-off factors, such as the sharp fall in prices for cellular phone service, its persistence suggests that more fundamental structural changes may also be playing a role.
It suggests? C'mon. The truth is quantitative easing is a Ponzi scheme (and there's no unwinding a Ponzi scheme). QE should have increased inflation exponentially, but when compounded with the deflationary effects of the Internet and cryptocurrency, you have the appearance of a balanced, low volatility market in the midst of one of the most tumultuous presidencies in U.S. history. This is truly the calm before the storm.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.