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Smartphones; the latest invisible ally of the Fed

Blog

Smartphones; the latest invisible ally of the Fed

James Robinson

Throughout my business career of some 60 years, I have always been fascinated by change — the dynamics of change and how businesses, governments and people respond to change. Or fail to respond. Throughout history, major technological trends have had a profound, and often invisible, impact on governments and traditional institutions.

In the digital era, this pace of change is amplified and relentless. While the tech and business communities are naturally immersed in these dynamics, many institutions are not reacting fast enough to how technology is changing our economy — and their own destiny.

I’ve been a student and a fan of the Federal Reserve since the 1960s. Having been involved in the banking and financial sector, including as the former Chairman/CEO of American Express for many years and now as a venture capitalist, I’ve always had to think about how the broader policy decisions were affecting the markets. From the business vantage point, it has been fascinating to watch how technology has both complicated and helped the Fed’s policy decisions.

For instance, one of the main missions of the Federal Reserve is to keep inflation low. Yet, it’s important to remember that for inflation to happen, someone has to raise prices. In this regard, over the last couple of decades, Walmart and then Amazon have been invisible allies of the Fed in accomplishing this goal. The latest invisible ally of the Fed in this regard is the smartphone.

With the smartphone, the power of pricing has shifted into the hands of the consumer even further, keeping downward pressure on retail prices. Today, mobile e-commerce represents 30 percent of all U.S. e-commerce, but, moreover, a recent study found that 90 percent of retail shoppers use their smartphones in-store to check prices, product information and reviews. This translates to an environment where everyone can compare prices and features, both online and offline.

So, unless you are in a unique luxury category, your ability to increase price is limited. Moreover, when you think about the growth of price comparison engines in other sectors outside of retail, such as Kayak for travel, NerdWallet* for credit cards, CoverHound* for insurance and others, it really drives the point home that the mechanics of price adjustment are more and more driven by transparency and choice in the marketplace.

So in effect, everyone with a smartphone becomes a deputy central banker…helping to keep prices in check.

That’s just the example using the smartphone. The broader point is that many of the old models and beliefs on which our fundamental economic and monetary policies are built need to be inspected through a different lens, embracing how technology will impact the economy of the future.

One example of this is the old equation economists have considered for years, MV=PT, where the money supply x velocity of money is equal to price x transactions. Most of the monetary policies in the last 50 years have been based around the money supply being the main driver for things like inflation, currency appreciation/depreciation and interest rates. The reality though, is that money velocity is extremely important, and virtually impossible to impact directly, let alone control.

For instance, the long-held adage that too much money chasing too few goods and services will cause inflation must be questioned. In the last few decades, the money supply itself has embraced so many definitions. The ability to trade or move money without an actual tie to the money supply seems endless. Given this, it makes sense to question the underlying assumptions around how much money supply itself can drive economic policy. This is just one example demonstrating how the implications of change can challenge fundamental beliefs.

Over the past couple of decades, technology has been a major driver of change and, although change can be scary or frightening, one thing is for sure: Change is inevitable.

So whether it is technologies that have been around for many years or new technology challenges, such as blockchain and cryptocurrency, change is not going away. This means institutions, central bankers and governments need to be paying attention to how the economy around them is changing. How and when will all this affect their own modes of operation or assumptions? The question is whether many of these institutions are reacting fast enough.

If I have learned anything from my experience in the private sector, the slower you are to react to change, the more painful it is to adjust once you must. Do you lean into change or risk being disintermediated by someone else? That’s a question all businesses must address — so too must the government, their agencies and political leaders.

*NerdWallet and CoverHound are RRE portfolio companies.