What Exactly is Neel Kashkari Trying to Accomplish? – My Two Cents

Bailouts, Banking, Consumer Finance, Currencies, Interest Rates, Modern Monetary Theory, My Two Cents, Trade War, , , , , ,

Neel Kashkari is hardly a household name. We’d speculate that most people wouldn’t recognize it. Neel was the Goldman Sachs alum who was hand-picked by Hank “A Strong Dollar is in the National Interest” Paulson back in 2008 to handle the disbursement of the TARP bailout money. That’s the $750 billion bailout that was initially shot down by the House, but eventually passed a few days later after Paulson did some rather heavy handed and unapologetic arm-twisting.

We’re going to link up a couple of videos throughout as sort of a walk down memory lane. 2008 was, after all, a dozen years ago already.

Ok, so what? What does this have to do with Neel? Well, after the bailout was passed, an odd thing happened. Instead of being used to buy troubled assets, the money went right to the banks. Kashkari was grilled by then Rep. Dennis Kucinich about his activities. Kashkari had already mastered the thousand-yard stare while being grilled which immediately caught our attention. He’d been trained for this.

After the brewing scandal was snuffed out by further epic plunges in global financial indices, Kashkari was quietly taken off the scene and ran like a refugee to a cabin in the woods of Northern California. He would remain there until 2016 when he was called off the bench to head up the Minneapolis Fed. That really got our attention. From a cabin in the woods to an extremely high level position in one of the most corrupt enterprises man has ever known after spending more than a half dozen years in exile? We should be so lucky.

Unfortunately, that’s not where the saga ends. Lately Neel Kashkari has been going around the talk show circuit saying that the only way to save the USEconomy is by doing essentially a full lock down on the US. Again, we’ll post some link to videos. We think Kashkari’s words carry a bit more weight just because of his pedigree and prior experience in sticking it to the taxpayers of this crumbling nation. How does a lock down save the economy?

We have a theory and we’re going to lay it out. The graphic below shows the rather alarming – and rapid – departure from the USDollar from two of the biggest up and coming economic powers out there: Russia and China. There are other countries engaged in similar activity and Andy has spoken on Liberty Talk Radio about these events for several years.

The USDollar’s reserve currency status is gone. It was in serious jeopardy going into this year, but after the blowout federal deficit even the dimmest bulb can see there is no way and certainly no will to ever pay off the national debt. Hyperinflation might be a tactic and we’ll talk about that eventually as well, but countries are bailing. It should be noted that the US is sanctioning EVERY SINGLE ONE of these countries at this moment and urging allies to do the same.

Other tripe and banal reasons are given, but this is clearly a move to protect the Dollar as long as possible. The house of cards is shaking and is about to get blown away like the houses of the first two of the three little pigs.

So why the call for a lock down? We’ll use basic economics to lay out our theory. When global demand for dollars decreases, those dollars need to go somewhere. If countries are using other currencies for international trade, their FOREX reserves will be changed to reflect this. Simply put, they won’t need to keep as many dollars. And why buy USGovt debt? It pays next to nothing – well below even the most cooked levels of price inflation. And there’s the very real possibility of switching to negative yields – especially in the series of shorter maturities.

These unneeded, unwanted dollars are starting to come home. Add to that all the funny money that has been created by the not-so-USFed to ‘buy everything’ in sight to keep financial markets stable. There are no reserve requirements, so the banking level can create massive inflation from making new loans. This is why the NASDAQ and S&P500 are at record highs. The repatriated dollars are being poured into financial markets and blowing up all manner of bubbles.

What is also happening is that consumer price levels are starting to rise at frightening levels. The change from May to June was .5654%, and the change from June to July was .5867%. These are annualized rates of around 7%. The central bank’s ‘comfort zone’ ends around 2.5% annualized.

US CPI-U

Kashkari’s argument for a lock down now makes perfect sense. If America goes back to lock down, we’ll see consumer prices drop from lack of demand as was seen in March, April, and May. A lock down would hide the effects of all this funny money flowing back into the US.

Let’s fold into the mix our paper on Modern Monetary Theory from last summer. The first premise is that a central bank/government that acts as its own bank cannot go broke. It can print until the lights go out in Tennessee. BUT.. when consumer prices start to go up, the next step is raise taxes to pull money from the system. There have been quite a few articles talking about higher taxes. With real unemployment and underemployment where they are, does anyone think a tax increase would fly?

A lock down might not fly either, but any decrease in aggregate demand that Kashkari is able to squeeze from his bully pulpit is going to ‘help’ the situation. Note – it’s not going to help the average person. This is a move to protect a broken currency regime, the institution that brought it to fruition, and the total corruption of fiat currencies in general.

Keep in mind that the partial lockdowns from March through June caused a 33% contraction in GDP according to the USGovt. Our model showed a 43% contraction. Given that we use a totally different methodology, the difference isn’t surprising. Since the USGovt’s GDP model uses the purchase of finished goods rather than intermediate goods, we can say that aggregate demand fell by about a third in the second quarter. You can see in the chart above the impact that had on consumer prices. Kashkari and his ilk are looking for more of the same.

Another such drop in prices would enable them to repatriate even more dollars without it become too noticeable in the real economy. We might get Dow 30K, NASDAQ 14K and S&P500 4K, but that is the ‘good’ kind of price inflation. If consumer goods went up in proportionate amounts, there would be even more rioting than there is at present.

Why not just destroy the unused currency? Most of it is digital anyway. That’s the most common question we are expecting. It is very important to understand that true deflation doesn’t occur unless money is actually destroyed. Falling prices do not mean deflation. You can create a little deflation on your own if you pull all the ‘money’ from your bank account in cash, then set it on fire. Why would I do that, I can still use it!!! And that’s the answer. The repatriated dollars aren’t going to be destroyed because they can still be used. Not by Mr. and Mrs. Joe Average, but by the banking system.

The next step in this decoupling process is for major trading partners to start requiring the US to settle transactions in some other currency or possibly even gold. Make no mistake, that is why this campaign of sanctions and threats of military action are in place against countries like Venezuela and Syria. When in doubt, follow the money. Forget the terrorism for a minute and follow the money. Nicholas Maduro and Bashar al-Assad are a clear and present danger to dollar hegemony because they’re stepping out of the dollar for international trade. Andy analyzed the situation in Syria almost 7 years ago and accurately predicted that Russia would not leave Syria hang out to dry. And even more importantly, WHY they wouldn’t leave Syria – and why they have yet to do so.

On a day the S&P500 recouped ALL of its losses due to a global pandemic that the experts are telling us is going to only get worse, we can look at the above mechanism and understand exactly how all those gains took place. It is perhaps ironic that over the past few month the USDollar has struggled mightily – even against other fiat currencies backed by nothing but the never-ending stream of hot air from bankers the likes of Neel Kashkari.

Graham Mehl is a pseudonym. He is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as a policy analyst for several hedge funds and has consulted for several central banks. Among his research interests are finding more reliable measurements of economic activity than those currently available to the investing public using econometric modeling and collaborating on the development of economic educational tools.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of econometric modeling with constant reflection of economic history. His focus is also educating young people about the science of Economics using an evidence-based approach

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Where Do We Go from Here? Economic Analysis for Remainder of FY2020

Bailouts, Consumer Finance, Debt Ceiling, Economics, Modern Monetary Theory, My Two Cents, National Debt, Trade War, , , ,

The world started 2020 on the most shaky of terms, economically speaking. The world was already in the early stages of a contraction in aggregate demand. The covers of magazines had articles of various corporate analysts and CEOs talking about a serious recession as early as late 2018. We stress this was a global contraction, not limited to one or even a few countries. As was the case in 2008 some would fare better than others for myriad reasons. The last few months of 2019 and the beginning of 2020 saw the resignation of CEOs from several prominent companies such as Disney.

Being perpetual cynics, we wondered if they knew something the rest didn’t. The prospect of a recession was largely downplayed in the US/UK/EU mainstream press, which was no surprise. They’ve been derelict in their duty for decades now. The average American/Brit/European had no idea what was coming. Even the central banking community was bathed in complacency. They’d achieved Ben Bernanke’s ‘Goldilocks Economy‘ even if only in their own minds.

We pointed to one event as a harbinger of an upcoming crisis as early as 2016 – the appointment of Neel Kashkari to the position of President of the Minneapolis ‘Fed’. Huh? Neel Kashkari was tapped by Henry ‘Hank’ Paulson back in 2008 to head up the TARP fund created by Congress in November of that year as part of the massive Wall Street bailout brought on by a spate of bankruptcies, insolvencies, and general financial mayhem.

Why Kashkari in 2016? The last we’d heard, he was living in the mountains of California planting potatoes or some such. The TARP mess stank on every level and it was apparent that once his work was done, Kashkari was off for a long, long early retirement. So his appointment to such a position registered an 8 out of 10 on the weird-stuff-o-meter.

Moving into 2020 the United States economy was balancing on the triple supports of consumerism, financial sector activity, and government excess. The FY 2019-20 Federal deficit was going to be one for the ages long before the term ‘Corona’ was known as anything other than part of the Sun.

Geopolitical tensions were high with the sanctioned assassination of a prominent Iranian general within the first few days of 2020 and the failed ongoing ouster of Venezuelan President Nicolas Maduro at the forefront. Add to that an ongoing trade war / war of words / saber-rattling between Washington and Beijing as well as a good deal of ill-rhetoric between Washington and Moscow. That’s just a small sampling.

With nearly all of the first world nations running persistent current account deficits and the rest of the economic superstructure living heavily on debt and financial speculation, it was only a matter of time. Would it be a pin that popped the ‘everything bubble’ or would it simply just slowly deflate (not to be confused with monetary deflation)?

So pervasive was and is the presence of debt in the circumstance of nations, states, trading blocs, provinces, municipalities, companies, and individuals that the trillions of dollars racked up by the US alone was not even viewed askance by economists OUTSIDE what would be considered the mainstream of the scientific economics community. Keynesianism was like a high-quality dime store pinata. Now matter how hard it was hit, it just kept spitting out candy.

We mentioned in My Two Cents on several occasions that this whole ‘system’, if you will, would go until it didn’t. It was a confidence game, just like the multitude of fiat currency regimes that backed it in the various corners of global commerce. As long as economic actors had ample supply of tokens (currencies), and another economic actor would accept those tokens in exchange for scarce land, labor, capital, and technology, the system worked.

Then the world got sick.

There has been much talk of ‘black swan’ events. The term was coined by a current events/geopolitics author Nassim Taleb. The black swan is something that nobody is looking or planning for. It is not on the radar. Period. There have been some who have been talking about pandemics in general for quite some time now in similar fashion to your authors considering the likelihood of economic fallout from the fact that the organized world has violated every law of economics imaginable. There’s always a reckoning day.

We are not going to discuss the SARS-nCOV-02 situation from a biologic/scientific standpoint as that is outside the scope of our expertise. We’re going to focus on nCV as a triggering event or black swan and the likely economic ramifications.

The amount of money that has already been borrowed/printed and spent is mind-blowing. It cannot be complicated by the human mind. The US National Debt blew right past $25 trillion. It is hard to fathom this but the growth of the national debt is a mathematical function based on the concept of fractional reserve banking. The debt was headed to where it is now anyway. That is going to be the biggest take-home. Would have it happened this fast without nCV? Probably not, but it was headed past $25T in the next 12 months regardless.

What nCV does is give governments the world over a free pass if you will on the print and spend / borrow and spend fiscal irresponsibility that has been going on for decades now. Europe reached its breaking point because of this foolishness in the past decade. The 2020s will be looked upon in history as the decade when the USDollar finally died.

That’s a bold pronouncement isn’t it? Not really. Who in their right mind is going to continue to lend to any entity that is so fiscally reckless? Ourselves along with many others have laid bare the runaway fiscal policy that has infected the US for so long. Now there is the element of public health involved and the general consensus is that we have to continue these spending policies, bailout entire industries, and even provide income to the populace. Anyone speaking out against any of this is labeled as being against helping people.

What needs to be understood is that this ‘help’ is only temporary. Think of the minimum wage. It is a very applicable analogy. Every increase of the minimum wage only lasts so long then another increase is required to produce the same result. Now, scale that up to the world’s economies and that’s what you’ve got. The ‘system’ needs ever-increasing amounts of stimulus to produce the same effect.

While grossly overused, the analogy of a drug addict is a very good one. Eventually the addict needs a fix just to feel normal. And so goes the global economy. If the stimulus is scaled back, the economy goes into withdrawal. The US economy is around 70% consumption and has been that way for nearly two decades now. This is not just a national or government problem. It transcends all layers of the economy. Even successful companies loaded up on cheap, low interest rate debt to conduct share buybacks, thus pushing stock prices higher.

Where do we go from here?

Even before the new year began, countries and companies outside the US were cutting deals outside the dollar. The dollar’s status as world’s reserve currency was being challenged. Expect that to continue – and accelerate. There won’t be a pronouncement that the dollar is no longer the world’s reserve currency. It likely will not be a headline. It’s been happening incrementally for years now. This latest fiscal quagmire will accelerate the matter. China is testing a digital currency. Russia has thousands of tons of gold. These countries don’t get along with America and Europe on a good day. The Russians already dumped nearly all of their US Government debt, but the Chinese still have a significant amount around $1 trillion.

Treasury Secy. Steve Mnuchin claims all that debt doesn’t give China any leverage on America. We’ll allow you to draw your own conclusions.

A global reshuffling of the economic order was already taking place before 2020 started. Europe endured a partial crisis over excess debt and the austerity that followed. And all of that was just a small piece of the problem. Economic history is replete with examples of complacent countries and empires who thought it could never happen to them. Complacency might just be the most dangerous state of mind that man can occupy. We are quite sure the Romans would agree.

Sutton/Mehl

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The Legacy of Coronavirus – Wall Street Journal

Bailouts, Consumer Finance, Economics, Geoeconomics, , , ,

Andy’s Notes: This is where the Keynesian leanings of policymakers and economists are going to finish off an already weakened currency and the economy that uses it. The question used to be ‘Should we borrow to stimulate?’ Now the question is ‘How much will be enough?’. This progression has occurred over the last dozen years and it’s a global one. Debt is the mighty elixir for all that ails. In a completely unironic twist, the lack of economic ‘wiggle room’ people, businesses, and governments have for dealing with a crisis has been largely caused by a reckless accumulation of debt. Now the solution being offered is even more debt. The world has, in fact, gone insane. Ladies and Gentlemen of the jury, I rest my case.

Sutton

The full impact of the coronavirus pandemic may take years to play out. But one outcome is already clear: Government, businesses and some households will be loaded with mountains of additional debt.

The federal government budget deficit is on track to reach a record $3.6 trillion in the fiscal year ending Sept. 30, and $2.4 trillion the year after that, according to Goldman Sachs estimates. Businesses are drawing down bank credit lines and tapping bond markets. Preliminary signs are emerging that some households are turning to credit for funds, too.

The debt surge is set to shape how governments and the private sector function long after the virus is tamed. Among other things, it could be a weight on the expansion that follows.

Many economists believe low interest rates will help the nation manage the soaring debt load. At the same time, they say high levels of private sector debt could lead to a period of thrift, slowing the recovery if businesses and individuals try to rebuild their savings by holding back on investment and spending.

“People and firms and government are facing a negative shock, and the classic textbook prescription for a temporary shock is to do some borrowing to smooth that out,” says Alan Taylor, an economist and historian at the University of California Davis, who has studied the economic effects of pandemics going back to the Black Death of the 14th century.

Borrowing now amounts to a transfer of economic activity from the future to the present. The payback comes later. “You do have something to worry about in terms of the recovery path,” Mr. Taylor said. Overall U.S. debt as a share of GDP has been rising since the 1980s. Since the 2007-09 crisis, stimulus plans pushed federal debt to post-World War II levels, while household debt shrank as people paid off commitments.

US Debt as Percentage of GDP (2020)

Past crises and buildups in U.S. government debt led to changes in the tax code and sharp fluctuations in inflation. In the private sector, debt loads could become a dividing line between firms that fail and those that emerge more dominant in their industries.

Because states run balanced budgets to avoid large debt, they are likely to dip into rainy day funds in the weeks ahead and could turn quickly to cost cutting to keep their budgets in line in a downturn, squeezing the economy.

Moody’s Analytics sees $90 billion to $125 billion of such cuts or tax increases coming and says the hits will be unevenly spread around the country. New York, Michigan, West Virginia, Louisiana, Missouri, Wyoming and North Dakota are especially vulnerable, it said.

The Federal Reserve, the nation’s central bank, will play the critical role of navigating the nation through the rising tides of debt. It sways the cost of debt service, whether inflation emerges and whether banks and other financial institutions can bear the burden of lending that the nation demands.

So far the Fed is getting high marks from President Trump and many economists and investors for moving quickly to make credit widely available, though it faces challenges and uncertainties deciding how far to extend itself and when and how to pull back. On Thursday, it announced more programs to support $2.3 trillion in lending.

During and after the 2007-09 financial crisis, the Fed expanded its own portfolio of securities and other holdings from less than $800 billion to $4.5 trillion. The Fed unwound some of that as the expansion took hold. Now, in the initial stages of the coronavirus crisis, it has stretched its holdings from $3.8 trillion last September to $5.8 trillion as of April 1, and is on track to increase them by trillions more in the months ahead.

“Had the Fed not come in these past few weeks, we would have had a combination of the Great Depression and the 2008 financial crisis,” said Mohamed El-Erian, chief economic adviser at Allianz, the Munich-based financial firm.

The U.S. government currently has $17.9 trillion in debt held by private investors and other governments—the amount it has borrowed from others to fund its annual budget deficits. That works out to 89% of U.S. gross domestic product, the highest since 1947. Before the coronavirus crisis, debt and deficits were pushed higher by ramped up government spending on military and other programs and tax cuts enacted in 2017.

Government borrowing will soar in the months ahead due to the $2 trillion economic rescue program, higher spending on programs like unemployment insurance and an expected fall in tax revenues amid lower incomes and corporate profits.

Mr. Trump is pushing for an additional Washington stimulus program focused on infrastructure spending. House Speaker Nancy Pelosi said another round of stimulus could exceed $1 trillion. That could include an expansion of small business loans and grants by another $250 billion.

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Dissecting the Disaster – Liberty Talk Radio Returns

Consumer Finance, Economics, Liberty Talk Radio, Monetary Policy, National Debt, Stock Market, , , , , ,

Readers: A huge ‘thank you’ to Joe Cristiano for having me on for his debut! We kept the time down, but did talk about a few angles to this whole financial/economic wash out that haven’t really been covered. A few have been totally ignored. It’s our hope that keeping these shorter will encourage more people to listen in. Thanks again Joe and it’s good to have you back!

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Q&A Answers – 3/21/2020

Consumer Finance, Economics, Geoeconomics, Liberty Talk Radio, Monetary Policy, National Debt, , , , ,

Since we were unable to do Liberty Talk Radio again, I’m going to address the questions we received here. The chart below will be a point of reference for most of them.

The chart above shows the Dow Jones Industrial Average from approximately 1905. You’ll have to click to see the chart in detail and I apologize for that – it is hard to get a decent chart with that kind of timeline.

The first ‘peak’ if you can even call it that was the roaring 20s and the bursting of the speculative bubble in late 1929. The Dow would lose more than 75% of its value before the move ended.

The next events are pointed to as well. The main question people have is ‘How was the DJIA near 30,000 to begin with?’ It’s a good question. There are a couple of reasons. First is inflation (growth of the money supply). More money chasing after a relatively fixed set of goods produces higher prices, all else being equal. Let’s proceed through the timeline to get to an answer about Dow 30,000.

Inflation and the revocation of the Glass-Steagall Act allowed for the run-up and eventual blowup of the dot-com bubble. The fact that many of the dot -com firms never made a single penny in profits yet sold for hundreds of dollars a share contributed as well. We’d call this part a speculative bubble. Inflation put the money in the system to allow the bubble to reach the level it did.

After the 2002-03 recovery, the central banks (globally) began serious interference in markets, causing distortions and artificially low interest rates (aka cost of capital) that allowed the next bubble – the housing bubble to inflate. Again, more money in the system due to inflation and a lower cost to that money thanks to the central banks and voila! Boom.

If you thought that was dramatic, the federal reserve in the US and other central banks began something known as ‘quantitative easing’ or QE. This is a fancy term for printing money from thin air and injecting it into the financial system and economy. In the business we call it ‘hot money’ because it’s like a hot potato. It moves around very quickly. From 2009-2019, we had multiple opportunities for what is happening right now and each time, the central banks intervened with more hot money and you can see by the shape of the curve after 2009 how the slope increases dramatically.

This general shape of curve is consistent with monetary systems that are built on fractional reserve banking and that feature a unit of currency that isn’t backed by anything tangible. Until 1971, the USDollar was at least partially backed by gold. I didn’t mark the area, but if you look on the chart at where the curve really starts to accelerate upwards, that was right in the 1971 time frame.

There has been some speculation about fractional reserve monetary systems of late. The important thing to note is that this particular type of system allows for inflation (the creation of new money) when debt is incurred. A quick example is in order. I take 100 depreciated American dollars to the bank and deposit it. Joe Cristiano comes along and asks my bank for a loan, they will lend him up to around $90 of my deposit. However, the bank still owes me my $100 initial deposit. At this point, the money supply went from $100 to $190.

One of the often used misconceptions is that, therefore, when loans are repaid, that equals deflation (the destruction of money). It does not. Let’s use our above example. Joe repays his loan to the bank after 30 days. Let’s say they were very charitable and say they charged him 1% total interest for the 30-day loan. So, he would repay $90.90. Now, my initial $100 is still in there so the total is now $190.90. No deflation.

However, when people pay down loans instead of taking out more debt it does dramatically slow the rate of bank-created inflation. This happened during 2010. Governments don’t like this because they’ve invested a great deal of time convincing people that inflation is necessary for growth to occur. If the people won’t borrow, you can sure bet the governments will do it for them and that is exactly what took place in 2010.

A final thought. A few asked if what is going on would have happened if we didn’t have a global biologic event. As you can see by the chart above, we’ve been long overdue. The QE done by the federal reserve is unhealthy for the economy and if our economy was truly healthy, it wouldn’t need constant stimulus or massive federal, state, local, and personal deficits to function. The ‘solution’ for nearly 2 decades has been to print money and blow up bubbles. Put simply, at some point bubbles always burst and this most recent one was looking for its pin.

Sutton, Mehl – 3/21/2020

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Q&A Session on Liberty Talk Radio 3/19/20 @ 24:00 UTC

Consumer Finance, Economics, Geoeconomics, Geopolitics, Liberty Talk Radio, Manufacturing, Monetary Policy, National Debt, Pensions, RIsk Management, , , , , , ,

Hello Readers,

I will be on either a brief Q&A segment with Joe Cristiano’s Liberty Talk Radio or I’ll be releasing a short podcast this evening. I know many of you are not in the US so my apologies for the short notice. Please email your questions when you can and we’ll go from there.

Topics? While I have medical training, I am not qualified to speak on the issue of COVID-19 beyond the most general of terms. I would like to focus on the global financial markets and the very strong likelihood that another 2008-style event was imminent as early as last summer.

Now, with global markets shredded, economies left in doubt, and the population of a growing number of countries behind closed doors, what needs to happen next? We’ve heard some solutions. Are they the right ones?

We’ll be addressing these issues – and your questions – tonight. Don’t miss it!

Best,

Andy Sutton

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