Friday, September 4, 2020

The Federal Reserve: Solving the COVID-19 Conundrum

Thanks to Federal Reserve Bank of Minneapolis President and Chief Executive Officer, Neel Kashkari, we now have a roadmap from the world's most influential central bank for the next stage of the "plandemic".  


Let's open by looking at Neel Kashkari's resume from his webpage on the Federal Reserve Bank of Minneapolis website:


You will notice that he has absolutely no formal training or work experience in virology, vaccinology or any other medical field that may provide the background knowledge for his forthcoming recommendations.  In fact, like many influential people in the United States, his background includes a stint at one of Wall Street's most reviled and influential companies, Goldman Sachs.

Kashkari's commentary opens with this statement:


"In just weeks, we could almost stop the viral fire that has swept across this country over the past six months and continues to rage out of control. It will require sacrifice but save many thousands of lives."


So, what is his solution?  Here is another quote from his commentary:


"We believe the choice is clear. We can continue to allow the coronavirus to spread rapidly throughout the country or we can commit to a more restrictive lockdown, state by state, for up to six weeks to crush the spread of the virus to less than one new case per 100,000 people per day.


That’s the point at which we will be able to limit the increase in new cases through aggressive public health measures, just as other countries have done. But we’re a long way from there right now.


The imperative for this is clear because as a nation what we have done so far hasn’t worked. Some 160,000 people have died and, in recent days, roughly a thousand have died a day. An estimated 30 million Americans are collecting unemployment." (my bold)


What does Kashkari believe is the root of the current virus containment problem?


"Why did the United States’ COVID-19 containment response fail, particularly compared with the successful results of so many nations in Asia, Europe, and even our neighbor Canada?


Simply, we gave up on our lockdown efforts to control virus transmission well before the virus was under control. Many other countries didn’t let up until the number of cases was greatly reduced, even in places that had extensive outbreaks in March and April. Once the number of new cases in those areas was driven to less than one per 100,000 people per day as a result of their lockdowns, limiting the increase of new cases was possible with a combination of testing, contact tracing, case isolation, and extensive monitoring of positive tests." (my bold)

What does Kashkari see for the future?  

"And the next six months could make what we have experienced so far seem like just a warm-up to a greater catastrophe. With many schools and colleges starting, stores and businesses reopening, and the beginning of the indoor heating season, new case numbers will grow quickly." (my bold)

So, what is Kashkari's solution?  


"We support the wearing of masks by all Americans, but masking mandates and soft limitations on indoor crowds in places such as bars and restaurants are not enough to control this pandemic.


To successfully drive down our case rate to less than one per 100,000 people per day, we should mandate sheltering in place for everyone but the truly essential workers. By that, we mean people must stay at home and leave only for essential reasons: food shopping and visits to doctors and pharmacies while wearing masks and washing hands frequently." (my bolds)


As I quoted at the beginning of this posting, Kashkari believes that the United States needs a lockdown for up to six weeks but, as we've seen during the pandemic, measures that are supposed to be temporary have turned out to be far longer in duration than was anticipated when they were undertaken.  He goes on that, without these measures, millions of additional cases with many more deaths are likely before a vaccine might be available.  This will mean that the economic recovery will be much slower with far more business failures and high unemployment for the next one to two years. 

Kashkari goes on to note why his lockdown recommendation will work:


"Unlike in prior recessions, remarkably, the personal savings rate has soared to 20 percent from around 8 percent in January.


Because we are saving more, we have the resources to support those who have been laid off. Typically, when the government runs deficits, it must rely on foreign investors to buy the debt because Americans aren’t generating enough savings to fund it. But we can finance the added deficits for COVID-19 relief from our own domestic savings. Those savings end up funding investment in the economy. That’s why traditional concerns about racking up too much government debt do not apply in this situation. It is much safer for a country to fund its deficits domestically than from abroad."


Here is what has happened to the savings rate over the past four years:

Here is a graphic showing the growth in nominal personal savings:

You will note that both the personal savings rate and personal savings in nominal terms have peaked and are already falling.  Certainly, as a percentage of disposable income, the savings rate has risen to record levels.  Unfortunately for businesses, this means that Americans are spending less largely because many businesses were shuttered as a response to the pandemic which had a ripple effect through the entire economy.  Consumers were not spending money consuming goods and services for a multitude of reasons; fear of unemployment, actual unemployment, the closure of retail businesses among others and in our consumer-driven economy, this has had a massive negative impact on real Gross Domestic Product as shown here:


None of these metrics would suggest a healthy economy nor would they in any way suggest that Washington should continue to expand its deficit spending habits ad infinitum.

Let's summarize.  While Neil Kashkari has suggested that a "hard" economy-wide shutdown for six weeks is the only solution to the pandemic until a vaccine has been developed simply because we can afford it thanks to the massive increase in savings, I would suggest that tens of millions of Americans living from paycheque to paycheque who will find themselves suffering yet again because they are not deemed "essential workers" may have something less than polite to say about his plan to battle the SARS-CoV-2 virus.  This includes the 32 percent of Americans who missed a housing or rent payment in July 2020 that Kashkari conveniently has forgotten about as shown here:


  1. Different thoughts:

  2. So his idea is that those Americans with savings will lend their money (buy government bonds) to support government through another lockdown, and that makes it all OK.

    Monetarily it's a bit better, but it does nothing at all for the real economy. Without productivity, we all become poorer. At some point it starts really cutting deep. If not, we're spending down our savings, not to buy government bonds, but to buy goods from overseas to sustain ourselves. Those with savings probably don't like Neel Kashkari making that decision for them.

    Also, the virus is worldwide. If everyone locks down, there literally isn't stuff to buy after a while, anywhere.

  3. Massive liquidity injections may temporarily mask a multitude of sins but is not a long term solution. While many investors talk about the link between low-interest rates driving the economy and markets ever higher this correlation is very weak. Japan is proof that low-interest rates do not guarantee a booming economy.

    The current low-rates combined with our massive government deficit is creating a false economy. It is also baking in a higher overall cost structure. Want to know where the real cost of things is going, just look at the replacement cost from recent storms and natural disasters. For more on why lower rates will not be our salvation see the article below.

  4. This article is spot on. I do not want to come across as harsh but those of us that have watched him over the years will rapidly concede that Federal Reserve Bank of Minneapolis President Neel Kashkari, knows nothing about economics or what makes the economy tick. Kashkari does not belong in a position of power.

  5. The U.S. only has a few options to deal with any problem: printing money and giving it to Wall $treet, using military weapons (buy some F-35s "because of coronavirus" and use the F-35s to fire missles at the virus apparently), spy on its citizens (use contact chaining of human cattle to stop spread of Covert-1984), and lock up its citizens (with Covert-1984 as the best excuse to date).