What the Fed Doesn’t Get About Low Inflation

Some days we just want to bend over and bang our head on the desk.

Again… and again… and again.

The world of money is not tough to understand.

Any self-minded bloke with a goal of ending the day with more than he started with can quickly master the realm of economics.

Why is it then that the overeducated wonks at the Federal Reserve can’t seem to figure it out?

The rules are simple.

Money goes where it’s treated best.

Give a saver the choice between two interest rates… he’ll choose the higher.

Give a shopper the choice between two prices… he’ll choose the lower.

And yet… the folks in charge of the nation’s money can’t seem to figure out why in the world the inflation they crave so bad (it’s their best form of job security) is nowhere to be found.

Perhaps they should stop having others do their shopping for them.

Temporary… Like a Heart Attack

Last week, the fine folks at the Fed let us take a peek at the minutes of their latest meeting.

Our head hit the desk.

The money maestros blamed “idiosyncratic factors” for the economy’s decadelong lack of inflation.

It’s a short-term problem, they say.

That’s right.

It’s a long, recurring string of “temporary” events that is keeping prices from budging higher.

It’s like saying a heart attack is a temporary health event.

Phooey.

The minutes from the meeting blamed a dip in retail clothing prices and a dip in sales of portfolio management services (a remnant, they claim, of last winter’s stock market rout) as the latest factors taking a slash at inflation’s neck.

We say it’s something different… something far more obvious.

And, again, if the folks in D.C. would climb down from their TSA-guarded ivory tower, they’d see it, too.

The Amazon Effect

Companies like Amazon, eBay, Apple and Google have reshaped the world’s economy.

No longer do we drive down to the local store and pay whatever price it’s asking.

Those days are over.

Now we scan the web to find the best prices, not in town, not in the state… but across the planet.

Often we can find somebody who needs to unload a product at any price. They may have too much of it… they could be going out of business… or the new guy simply put in the wrong price.

We just bought a switch for a piece of equipment, for example, for far less than its wholesale cost.

The seller was retiring and just wanted some cash.

A decade ago, the deal would have been impossible. We never would have found the fellow getting out of business in southern Kansas.

But the web has changed all of that… and it’s making it nearly impossible for prices to rise.

We’ve been pointing our finger at these facts since the ’09 recession and its low-inflation recovery. But it’s just in the last few months or so that the so-called “smart money” is catching on.

“Basic economic relationships are breaking down,” said Mohamed El-Erian, the respected former head of PIMCO.

He told folks at the Mortgage Bankers Association that he, too, has been stumped by the lack of inflation. He said traditional economic logic would have inflation surging with unemployment and job vacancies in such strong shape as they are in today.

But that’s clearly not the case.

“There is a complete change in the underlying relationship,” he said, “which means that the models are no longer as accurate as they used to be.”

We hope the folks at the Fed heard his words and took some notes.

But they don’t need to write too much.

The rules are simple.

Money goes where money is treated best.

These days, it’s not going to your local retailer unless he has the absolute lowest price.

It’s good news for most folks.

But it makes the folks at the Fed look like a bunch of dopes.

This “problem” isn’t temporary.

It’s only going to get stronger.

Make sure your investment strategy takes advantage of it.

Note: The Fed is desperate to get itself out of a nasty trap. That’s why we’re convinced it’s going to announce something quite sinister on June 19. It involves America’s top asset… and the results of this move could be very painful. But there is a way to “opt out” of this move. It takes just five simple steps. Click here for all the details.

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