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The Federal Reserve’s New Inflation Target Is Insulting And Backwards

On February of 2015, ABC’s then smash-hit show Modern Family went rather experimental. Its creators filmed a full episode entirely on Apple iPads. Though this cash cow of a television franchise had access to the best of the best when it came to film equipment, the filming quality on iPads that could be had for several hundred dollars enabled the creation of what was one of the most watched shows in the world.

Somewhere director Barry Sonnenfeld (“Get Shorty”, “Men In Black”, etc.) was smiling, along with seemingly every other film school student the world over. Sonnenfeld attended the highly prestigious New York University film school in the 1970s, and as he recalled in his excellent memoir (Barry Sonnenfeld, Call Your Mother) released earlier this year, very few student films were “taken all the way to print, since the cost of making one was substantial.” Not only was camera access a wildly costly concept well beyond the means of starving students (Sonnenfeld recalls how even non-student filmmakers would pursue “1 day” camera rentals ahead of three day weekends to stretch access…), there was the added cost of transforming what had been caught on film into something watchable. Life not too long ago was expensive and primitive.

So what happened? Economic growth happened. Contrary to the musings of hopelessly confused economic theorists with PhDs next to their names, and who believe near unanimously that prosperity is a consequence of consumption, the actual truth is that growth springs from savings and investment. When people consume less of their incoming wealth denominated in dollars, the unspent wealth flows in the form of investment toward the creation of all new products and services that were previously unimaginable.

For film students of the present, the technology that they bring to school in their pockets puts them in a position to do what those who came before them only dreamed of. The “student film” can now be very high quality at very low cost assuming the person holding the camera has talent.

Sonnenfeld’s memories rate mention ahead of the latest news from the Federal Reserve. Endlessly searching for relevance as market forces continue to push it toward obsolescence, top Fed officials made it known to the Wall Street Journal that they would no longer make 2 percent inflation their target. Of the belief that the target limited their ability to centrally plan economic growth, Fed officials decided to abandon it. 

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Let’s unpack this clown show for a bit.

If we accept without protest the Fed’s definition of inflation, it should be said that even when the target was 2 percent that the central bank had made it policy to double the price level every 36 years. That’s not very fair to savers. They save money now in the hope that the monies saved will exchange for abundant goods and services in the future. The Fed, if we once again accept its inflation definition, has long made it known that it would rob from savers and investors the single greatest factor when it comes to abundant retirement: time.

Where’s the outrage been? Who knows?

Fast forward to the present, this same central bank is now saying that 2 percent isn’t enough, that the Fed will deprive savers and investors even more of the time that pairs with compound interest on the way to potential retirement in comfort. Is it any wonder that the commoners have such a low view of the political class, along with the institutions created and deified by the political class? Time is the best friend of the saver and investor, but the Fed has inflation targets it must adhere to, or not adhere to. Don’t you get it?

Thinking about investors, they are yet again the creators of progress. Their abstinence builds the capital base necessary for entrepreneurs to bring a much less expensive future into the present. Savings have once again made it possible for the “student film” to actually be made, and a major driver of the latter has been investor comfort that any investment returns won over time will actually flow out dollars that have maintained their exchangeable value. Except that the Fed disagrees.

Even though all companies, jobs and lower prices born of progress are a consequence of investment, the Fed’s explicit aim is to make investment riskier than it already is. If long-term returns are going to pay out dollars exchangeable for less, why pursue long-term returns? This is something Fed officials never answer, or presumably even contemplate in their stupor.

Defending the PhDs just a little, their definition of inflation isn’t currency devaluation. Much as people want to believe differently, and much as they write differently, the Fed doesn’t control the value of the dollar. It never has. This is important when it’s remembered that the traditional definition of inflation has long been a decline of the unit of measure that is money. Translated, inflation has long been defined by the purchasing power of a currency declining.

The problem is that Fed economists (and economists well outside of the central bank) believe that economic growth is evidence of, or the cause of inflation. Except that it isn’t.

Economic growth is born of productivity advances, and as the Sonnenfeld example makes plain, feverish investment in technological advance has made exponentially more film production at a fraction of the cost much more of a reality. The previous truth can be extrapolated across all manner of industries. In modern times, and thanks to past abstinence that fostered investment, our ability to produce a great deal more at costs that continue to plummet has soared.

In short, the Fed is pursuing an inflation target that in a theoretical sense insults and subdues the very investment that powers economic growth. The central bank is doing this based on a theory about inflation that says economic growth causes prices to rise. No, economic growth is the biggest enemy rising prices have ever known. The Fed’s inflation definition is insulting and backwards.

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