They Saved the Economy (But Have You Been to the Grocery Store?)

It reminds me of that great Groucho Marx line: “Who are you going to believe, me or your lying eyes?”

A week ago, the Consumer Price Index numbers for April were reported. They showed that over 12 months, the CPI had climbed 2 percent. But food prices were the attention getter, reported to have risen 0.4 percent for the month.

Annualize that.

It’s hard to take government numbers seriously when confronted with the evidence of our own eyes.  Just yesterday I was dispatched to Safeway to pick up a few things. As soon as I got home, my wife noticed that a large carton of Safeway’s Lucerne brand cottage cheese, which has long been 32 ounces, has suddenly been repackaged in a 24 ounce carton.

There’s a lot of that sort of thing going on these days. We’ve all seen it — laundry detergent, cereal, paper towels, cookies, peanut butter and other products, all being repackaged to conceal price increases. But then who are you going to believe, government statistics or your own experience?

I call it the phenomenon of the incredible shrinking candy bar. We see it when inflation starts moving.

Producers, wholesalers, retailers and marketers get very creative about passing higher prices along to the consumer. You may feel deceived when you notice that the new cereal box appears to be the same size — the front of the box looks the same — but it has actually been narrowed considerably.

Producers, wholesalers, retailers and marketers are getting very creative about passing higher prices along to the consumer.

It wasn’t long ago that my wife came home angry because what had always been a five-pound bag of sugar had suddenly shrunk to just four pounds.

Smaller packages are just one manifestation of the rising prices. Sometimes it’s a deterioration in product quality. Other times service is downgraded. If balancing your new tires was free, now it costs; if delivery and set-up was free, now it’s extra.

I suppose it’s a normal thing for people to blame the producers and the merchants for these things. But such blame is misplaced since they are victims, too. Victims of a round of monetary malfeasance dating back to the mortgage meltdown in 2008.

At this juncture, with consumer prices beginning to rise, the narrative that former Treasury Secretary Tim Geithner is proclaiming with his new book, that he and the Keynesian crew of Geithner’s predecessor, Henry Paulson, former Fed Chairman Ben Bernanke, and the rest “saved the economy,” is more than a little unseemly.

Paulson has also been full of praise for the way he and Geithner and Bernanke worked with each other to “Stop the Collapse of the Global Financial System,” as his book’s subtitle so modestly describes their heroics.

Does it strike anybody as odd that capitalism should be so very frail, and that although it is capable of creating wealth and prosperity such as the world had never before seen, it can easily be brought to its knees by the misfortunes of a handful of reckless crony banks?

Even if not true, this narrative proved to be persuasive enough to enable those cronies to become the special beneficiaries of a wealth transfer of epic and unprecedented scale.

In any event, one must take the economic “saviors” claims of success with a great deal of skepticism. Among the saviors was Neel Kashkari. A colleague of Paulson’s at Goldman Sachs, Kashkari was named to manage the TARP program, the $700-billion Bush bailout.

Now running for governor of California, Kashkari, with all the characteristic modesty of the rest of his colleagues, claims that the bailout program was not only a success, but that it actually made a profit.

In other words, despite capitalism being so pathetically inept, once the economic saviors took on the task, deftly applying just the right resources to just the right places at just the right time, the water of capitalism’s failure was turned into the wine of profitability.

It is well past time to reconsider the entire narrative that we have gotten from the monetary and fiscal authorities about their actions. It is a narrative repeated endlessly by the influential and well-connected institutions that profited from the policies. Of course the shameless wealth transfers were a success from their perspective. They got the money!

But there is another side to the balance sheet: the costs. A hard reckoning of the price paid has yet to be made.

The narrative of success is also a short-term story. While the banks have temporarily kept their freshly printed windfall dollars quietly on account with the Fed, the short-term view has prevailed. And while it is true, as Keynes observed, that in the long run we are all dead, the short-term narrative is beginning to expire, the money is beginning to move, and we are still here to witness its aftermath.

Among the costs that we will have to confront is some $400 billion that savers have been deprived of as the Fed contrived its zero interest-rate policy. It was a move to make the banks whole at the expense of savers. It may not be long before we learn about the consequences of that policy on Americans who were forced to seek riskier alternatives to the pitifully low rates earned on savings.

Some close observers of the Fed’s economic miracles are starting to get nervous for other reasons. In a piece this week speculating about what the Fed can do with the trillions of dollars it printed to take troubled bonds off the books of the banks, Wall Street Journal reporter Jon Hilsenrath discusses the Fed’s interest-rate tools. He writes, “As Fed officials move toward a new system, trading in the fed funds market could dry up and make the fed funds rate unstable. That could unsettle $12 trillion worth of derivatives contracts called interest rate swaps that are linked to the fed funds rate, posing problems for people and institutions using these instruments to hedge or trade.”

Phoenix Capital Research has responded to this account saying, “So …  the Fed may not be able to raise interest rates because Wall Street has $12 trillion in derivatives that could be affected?

“Weren’t derivatives the very items that caused the 2008 Crisis? And wasn’t the problem with derivatives that they were totally unregulated and out of control?

“And yet, here we find, that in point of fact, all of us must continue to earn next to nothing on our savings because if the Fed were to raise rates, it might blow up Wall Street again …

“Simply incredible and outrageous.”

So now, after all the crazed money printing of the past six years; after all the monetary authorities’ certainty and bluster about the wisdom of what they were doing; after turning a deaf ear to the Austrian economists whose track record of warnings on such polices has been dead-on; after all of that, we are beginning to hear forebodings from the authorities. They are whispering among themselves that they don’t know how to exit from their reckless policies.

The most destabilizing results of the Fed’s actions are beginning to show up in the price of groceries. In the repackaging of consumer goods like cottage cheese to conceal price increases. In the faces of shoppers in the checkout line wondering how they will make the household budget work.

The further squeezing of the middle class has been forestalled for a while, but seeing is believing. Rising prices at the grocery story tell us that the Fed’s monetary excesses are now beginning to trickle into everyday commerce in the form of higher prices.

And what starts as a trickle can end in a flood.

Best wishes,

Charles Goyette

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