Happy Halloween: My Costume is Keeping Your Rates Low
How is a dinosaur costume changing rates?
First, Happy Halloween. I hope everyone has a safe and fun holiday. The picture above is yours truly in a blow-up dinosaur costume I purchased for $25. Quite a steal! It is crazy to think that my purchase has changed the world and your Halloween costume likely has too. It is hard to imagine that we are transforming the economy with a simple purchase of a blow-up dinosaur that is hard as hell to walk in.
Most people incorrectly think the Federal Reserve “sets” consumer rates (like cars, mortgages, etc.) The Fed only sets very short-term rates via the federal funds rate. This is the rate that banks utilize to make loans to each other. This doesn’t have a direct impact on long-term rates. These rates are driven by market perceptions of future inflation, economic growth, etc.
HOW IS A DINOSAUR CHANGING RATES?
One of the biggest drivers of inflation (which drives rates) is the cost of goods sold. Basically, in an inflationary environment, you pay more for goods as prices increase. My dinosaur costume at $25 is pretty reasonable.
How is it so cheap?
In a nutshell, my costume is indicative of the supply chain efficiency taking place now and keeping prices low.
I’ll term this the Amazon effect.
Ten years ago, you had to physically walk into a store, try on a bunch of costumes and walked out with a new getup for Halloween. This same costume would have been double the cost it is today.
Now, you go on Amazon, see who the cheapest provider (I’m not looking for daily long-term usage, it would be a little weird driving around in a blow up costume looking at real estate), and two days later it was at my door. I spoke with no one and they sent it from some warehouse when I requested it. It wasn’t sitting on a shelf in a retail store that is paying rent, sales clerks, taxes, lights, etc…
Essentially one step of the supply chain was eliminated along with the margins that were charged.
WHY IS THIS IMPORTANT?
Although I think I look snazzy in my dinosaur costume and got rave reviews from random passersby, how does this really have an impact on the world?
This supply chain impact has morphed from consumers to businesses.
Before, if you owned a shop that made widgets and you needed supplies, you likely had a salesperson that serviced your business and was familiar with the widget business. One of the biggest players in this space was Grainger, a business-to-business supplier that had awesome margins since it was one of the few suppliers of parts for the widget machine that a business owned.
THE WORLD CHANGED
In 2005 Amazon bought a business called Small Parts that supplied industrial parts to various business customers. Nobody blinked an eye; how could a “book company” upset established B2B companies?
Fast-forward 12 years and Grainger and others are sweating.
A report by Goldman Sachs found that Amazon and Grainger both carried 98 of 100 products that Goldman sampled. Of that, Grainger's prices were at a 55 percent premium to Amazon. It also found that Fastenal was at a significant premium of 49 percent. Why would a business customer pay 55 percent more to buy a part for their widget from supplier X than supplier Y?
The answer is they won’t.
The Amazon effect is overtaking the business-to-business marketplace, driving prices down. This seismic shift in pricing ability has rippled through the economy. As mentioned above, inflation is driven by increased prices. Prices are only going down from here. As businesses shift to lower cost suppliers, they will eliminate a 55 percent premium on their supplies, which can be passed to consumers in the form of lower prices or services.
THIS LOWERING OF PRICES WILL KEEP INFLATION DOWN AND LONG-TERM RATES LOW
This phenomenon is only beginning as Amazon and others take aim at the middleman in other industries like groceries (Amazon bought Whole Foods), appliances, etc. All of which will bring prices down throughout the economy.
It is crazy to think that a blow-up dinosaur costume selected by my four- and and seven-year-olds can change the world.
The Federal Reserve should trade in their suits for a blow-up dinosaur costume; this would be considerably cheaper on their wardrobe budget and help keep everyone’s rates low.