Federal Reserve Chairman Alan Greenspan led America’s central bank in raising the federal funds rate by 0.25 percent on February 2 to 5.75 percent. This will increase the annual payments on a $100,000 mortgage by $211. “It means we’re going to have to keep renting,” first‐time house‐hunter Carrie Dillard lamented to NBC News. This is bad news, 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 similar hikes. 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 recently deigned to give families. That’s real money picked from the pockets of hard‐working Americans, all to fuel Greenspan’s phobia about an inflation problem that was extinguished in 1982.[ep
According to a statement, the Fed’s Open Market Committee “believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.” Mainly? May? Foreseeable? The Fed is curing a theoretical disease with bodily harm. Once again, the Fed’s central planners are thoroughly, indeed dangerously, out of touch with reality. Where’s the inflation?
“We do not see inflation,” says Jeremy Hildreth, senior economic analyst with American Skandia, Inc. “What we do see are central bankers who believe that they must constantly be ‘doing something’ to make things better or keep things from falling apart.” Hildreth observes that America’s GDP grew at 4 percent in 1999. Last year’s inflation rate was a modest 2.7 percent, while “core” inflation — net of fuel and food prices — snoozed at just 1.9 percent. Although import prices grew 7 percent last year, excluding oil, import costs rose precisely 0.0 percent in 1999. Is Chairman Greenspan seeing things?
Captain Kirk sees the truth on inflation. More accurately, William Shatner — the actor who portrayed Kirk on “Star Trek” — currently appears in self‐effacing TV ads for Priceline.com. “I’m getting red‐carpet treatment at shag carpet prices,” Shatner warbles in a voice that could knock a comet off its path. Priceline.com is helping Americans pay less each day for airline seats, hotel rooms and even groceries.
Such “commoditization” webpages have created a mighty, market‐based force that promises to keep prices stable or even shift them into an Earthward trajectory. By allowing consumers to set their own prices for goods and services, rather than the reverse, businesses raise prices at their peril.
“My wife looked at Cheaptickets.com and Priceline.com and got a round‐trip ticket from New York to Olbia, Italy, on the island of Sardinia, 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 prices down — instead of competing to drive prices up,” the site explains. During one‐ to four‐day periods, consumers bid on appliances, luggage and 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 its appearance on‐line. As the sale continued for another five hours and three minutes, the price could have sunk even lower.
These price‐cutting websites will become much busier as more Americans go on‐line. Every day, 17,000 first‐timers enter cyberspace, Media Metrix estimates. Ford Motors announced on February 3 that it would give brand‐new Hewlett‐Packard computers and printers and $5.00-per-month UUNET web subscriptions to its 170,000 domestic employees and 180,000 overseas workers. “The more on‐line connectivity increases in the consumer marketplace, the more downward pressure there will be on prices,” predicts Thomas Lispcomb, Chairman of the Center for the Digital Future, a Manhattan‐based think tank.
This also applies to business‐to‐business and government purchases. When the Commonwealth of Pennsylvania used FreeMarkets.com to seek bids on snow‐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 percent savings. In just one day, FreeMarkets.com says, a global 1000 company’s expenses for printed circuit boards plunged from $24 million to $14 million, a 42 percent reduction. Producers who raise prices in this environment might as well slander their customers.
The accelerating diffusion of cheap computers and Internet access will help Captain Kirk and America’s high‐tech industry stabilize prices here on Earth while the inflation‐obsessed Chairman Greenspan and the Fed remain lost in space.