Guest Post by MN Gordon from his blog, Economic Prism:
On April 10, 2020, at the apex of mass coronavirus hysteria, Minneapolis Fed President Neel Kashkari appeared on 60 Minutes. With eyes bugging out of his head, he offered a critical insight.
That the Federal Reserve has “infinite cash” and will do whatever it needs to make sure there is enough cash in the banking system.
What Kashkari didn’t mention is that when infinite cash is supplied to the banking system the quality of that cash ultimately reverts to its intrinsic value – zero. By 2022, the applications of infinite cash had pushed consumer prices to a 40 year high.
While cash is still worth more than zero, it’s worth far less than it was just three years ago. According to the Bureau of Labor Statistics own inflation calculator, the dollar has lost about 20 percent of its purchasing power over this time. In reality, and as American consumers have experienced, the dollar’s loss of purchasing power is far greater.
By the BLS calculator, workers who haven’t gotten a 20 percent raise since 2020, are worse off than they were just three years ago. Certainly, a lot has happened over this time. But we presume most workers are not making 20 percent more than they were in 2020.
This is how the inflation tax works. The federal government prints money and spends it. Consumers pay for it via currency devaluation.
Yet, at the same time, to contain the inflation of the Fed’s own making, consumers are also dealing with higher interest rates. It is a brutal situation, where consumers are using credit cards to make ends meet, while also having to pay higher debt servicing charges.
The $700 Billion Man
Last week, Kashkari, while speaking at the Economic Club of Minnesota, marveled at how consumer spending has continued in the face of the Fed’s interest rate hikes.
“I would have thought with 500 basis points or 525 basis points of interest rate increases, we would have slammed the brakes on consumer spending and it has not slammed the brakes on consumer spending. It continues to exceed expectations.”
Then, this week, in an essay posted to the Minneapolis Fed’s website, Kashkari put the odds of further Fed rate hikes, above and beyond an additional 25 basis point increase, at 40 percent. This, according to Kashkari, would be needed to get consumer price inflation back down to the Fed’s 2 percent target.
We’ll have more on the plight of the lowly consumer in just a moment. But first, let’s remember who Kashkari is, so as to better understand the words he speaks.
If you recall, about 15 years ago, as federal bailout chief, Kashkari functioned as the highly visible hand of the market. When the sky was falling in early-2009, he awoke each morning, put on his pants one leg at a time, drank his coffee, and rapidly funneled Treasury Secretary Hank Paulson’s $700 billion of TARP funds to the government’s preferred financial institutions.
Incidentally, the experience had a severe effect on Kashkari’s mental health. He lost his mind.
Shortly after blowing through the $700 billion Kashkari became a hermit and took to a cabin in the Sierra Nevada Mountains – near Donner Pass. There he pursued his other life’s purpose of chopping wood and burning it. We thought we’d seen the last of him.
Boom and Bust
Sadly, true believers are incapable of amiably exiting the trappings of public life for good. After a failed California gubernatorial campaign in 2014, losing to retread Governor Jerry Moonbeam Brown, Kashkari resurfaced as Minneapolis Fed President in 2016.
We presume this appointed position was Kashkari’s reward for the abuse heaped upon him from grandstanding Representatives – table pounders like Barney Frank and Maxine Waters – while handing out $700 billion in taxpayer dollars to Wall Street banks.
We don’t know how these appointment decisions are made. Perhaps someone in the executive branch made a phone call. The point is Kashkari is positioned at a post where he can exact maximum destruction on American citizens, as he pursues scientific management of the economy for the benefit of the central bank.
For real central planners like Kashkari, appointed positions are the crème de la crème. For the rest of us lowly wage earners these appointed positions come at a cost.
Central bankers, through their extreme intervention in credit markets, perpetuate a boom-and-bust cycle that’s far beyond anything which could ever occur under a gold standard with market determined interest rates.
In 2020-21, the Fed artificially pressed interest rates to nearly zero and flooded the economy with $5 trillion of infinite cash; thus, inflating consumer prices to a 40 year high. Since then, the Fed has hiked interest rates 5.25 percent and removed $1 trillion of its infinite cash.
Remember, the effects of rising interest rates take time. The economy is dynamic, and the infinite relationships and exchanges that occur are nonlinear.
Where Did Neel Kashkari’s Infinite Cash Go?
By this, the economy is a social system not a mechanical system. It doesn’t work as a teetertotter, where if you push down on one side the other side goes up. Movements are erratic, often appear irrational, and are the result of countless competing points of stimulus.
The new regime of higher interest rates is currently filtering its way through all areas of the economy and financial markets. The cause and effect can appear delayed, as the movements are far from mechanical.
Kashkari’s excitement that consumer spending “continues to exceed expectations” in the face of rapid interest rate hikes will soon fade. The Fed’s yo-yoing of credit markets has set consumers up for untimely disaster.
First consumers were enticed by low interest rates to take on massive debt. Then, as consumer prices rocketed to the moon, more and more debt became essential to make ends meet. All the while, interest rates, as benchmarked by the 10 Year Treasury yield, have increased to 15-year highs.
At this point, and regardless of what Kashkari says, consumers are all tapped out. Any excess savings they managed to accumulate during the government lockdown are now gone.
This was the conclusion reached by Kashkari’s cohorts at the Federal Reserve Bank of San Francisco. The grim details were reported by Bloomberg earlier this week:
“Americans outside the wealthiest 20 percent of the country have run out of extra savings and now have less cash on hand than they did when the pandemic began.
“For the bottom 80 percent of households by income, bank deposits and other liquid assets were lower in June this year than they were in March 2020, after adjustment for inflation.
On top of that, U.S. credit card debt recently eclipsed the $1 trillion mark for the first time ever.
So, where did Kashkari’s infinite cash go?
Naturally, it was a lie all along. And with the turn of the credit cycle, it turned to infinite misery for broke, overindebted consumers.
