When it comes to inflation, ignore Chairman Greenspan and listen to Captain Kirk.
Federal Reserve Chairman Alan Greenspan led America's central bank inraising the federal funds rate by 0.25 percent on February 2 to 5.75percent. This will increase the annual payments on a $100,000 mortgageby $211. "It means we're going to have to keep renting,"first-time house-hunter Carrie Dillard lamented to NBC News. This is badnews, too, for carpenters, plumbing contractors and furniture dealers,to say nothing of the unemployed.
Over the next few months, the Fed is expected to impose two similarhikes. If the Fed boosts rates another 0.5 percent in coming months,that $100,000 mortgage would cost $633 in higher annual borrowing costs,exceeding by $133 the $500-per-child tax credit that Washington recentlydeigned to give families. That's real money picked from the pockets ofhard-working Americans, all to fuel Greenspan's phobia about aninflation problem that was extinguished in 1982.[ep
According to a statement, the Fed's Open Market Committee "believesthe risks are weighted mainly toward conditions that may generateheightened inflation pressures in the foreseeable future." Mainly?May? Foreseeable? The Fed is curing a theoretical disease with bodilyharm. Once again, the Fed's central planners are thoroughly, indeeddangerously, out of touch with reality. Where's the inflation?
"We do not see inflation," says Jeremy Hildreth, senior economicanalyst with American Skandia, Inc. "What we do see are centralbankers who believe that they must constantly be 'doingsomething' to make things better or keep things from fallingapart." Hildreth observes that America's GDP grew at 4 percent in1999. Last year's inflation rate was a modest 2.7 percent, while"core" inflation -- net of fuel and food prices -- snoozed at just1.9 percent. Although import prices grew 7 percent last year, excludingoil, import costs rose precisely 0.0 percent in 1999. Is ChairmanGreenspan seeing things?
Captain Kirk sees the truth on inflation. More accurately, WilliamShatner -- the actor who portrayed Kirk on "Star Trek" --currently appears in self-effacing TV ads for Priceline.com. "I'mgetting red-carpet treatment at shag carpet prices," Shatner warblesin a voice that could knock a comet off its path. Priceline.com ishelping Americans pay less each day for airline seats, hotel rooms andeven groceries.
Such "commoditization" webpages have created a mighty,market-based force that promises to keep prices stable or even shiftthem into an Earthward trajectory. By allowing consumers to set theirown prices for goods and services, rather than the reverse, businessesraise prices at their peril.
"My wife looked at Cheaptickets.com and Priceline.com and got around-trip ticket from New York to Olbia, Italy, on the island ofSardinia, for under $200.00," Navy Captain David Duffie told me."That's a great deal."
At Mercata.com, "you cooperate with other shoppers to drive pricesdown -- instead of competing to drive prices up," the site explains.During one- to four-day periods, consumers bid on appliances, luggageand more. Each item's final cost is based on the number of units sold.On the website, consumers can watch prices drop. A Sharp DVD/CD player,for instance, was available for $175.71, a $64.28 decrease since itsappearance on-line. As the sale continued for another five hours andthree minutes, the price could have sunk even lower.
These price-cutting websites will become much busier as more Americansgo on-line. Every day, 17,000 first-timers enter cyberspace, MediaMetrix estimates. Ford Motors announced on February 3 that it would givebrand-new Hewlett-Packard computers and printers and $5.00-per-monthUUNET web subscriptions to its 170,000 domestic employees and 180,000overseas workers. "The more on-line connectivity increases in theconsumer marketplace, the more downward pressure there will be onprices," predicts Thomas Lispcomb, Chairman of the Center for theDigital Future, a Manhattan-based think tank.
This also applies to business-to-business and government purchases. Whenthe Commonwealth of Pennsylvania used FreeMarkets.com to seek bids onsnow-melting rock salt, suppliers undercut each other as costs fell from$33 million at 9:00 a.m. to $30.5 million at 6:05 p.m., a 7 percentsavings. In just one day, FreeMarkets.com says, a global 1000 company'sexpenses for printed circuit boards plunged from $24 million to $14million, a 42 percent reduction. Producers who raise prices in thisenvironment might as well slander their customers.
The accelerating diffusion of cheap computers and Internet access willhelp Captain Kirk and America's high-tech industry stabilize prices hereon Earth while the inflation-obsessed Chairman Greenspan and the Fedremain lost in space.