The quarterly Advisory Board organized by Incrementum Liechtenstein took place recently, and, as usual, the discussion was focused on challenging the consensus view. Part of the discussion was centered around helicopter money which is one of the anticipated scenarios that central banks around the world will launch shortly, meant as a monetary tool to ‘stimulate’ the economy.
We believe the discussion about helicopter money was particularly interesting, and, in this article, we picked out some key thoughts on that topic. We recommend readers to read the whole document (i.e., transcript of the meeting), in order to get valuable thoughts on the consequences of helicopter money on financial markets and inflation.
Besides helicopter money, some trading ideas were discussed, as well as the consequences of the Brexit, gold and mining stocks, inflation expectations and the outlook for the US dollar. Read the full document (pdf).
James Rickards discusses different forms of helicopter money as well its economic consequences :
I don’t think we’ll see it in 2016, but I’d say it’ll definitely be on the agenda in 2017. It makes sense to start with a definition of what helicopter money actually is, because a lot of people are going to the cameras and to the news without actually having understood what it is. One thing that it’s not: It’s not dropping money out of helicopters. But what it means: It is money printing, but a different kind of money printing than we had so far.
The big question is: How can you print money such that it’s certain to be spent? It’s a problem if people don’t spend because they’re fearful, too concerned, they want to save or want to do leverage – and it’s the same thing in the corporations. If the economy is in a liquidity trap, you turn to government, because the government is really good in spending money. So the idea is: The government spends the money and the money thus comes into circulation – if they build a bridge, if they build a train station or whatever. So somebody gets the job, somebody sells concrete, steel, glass and so on. So you put the money into circulation, you increase GDP – but obviously this increases the deficit. Well, then they say: “Fine, the government will just issue some bonds to cover the deficit”. And if you ask: “Well, who will buy the bonds at a reasonable interest rate?” The answer is: The central bank will buy the bonds and they’ll do that with printed money. So in the end of the day, we’ll still have central banks printing money. To a large extent it looks like QE, but the difference is that the money is 100% certain to be spent, because governments are really good in spending money and apparently that expands the economy.
The basic question is on what will governments spend the money on? Here the elites – by that I mean Larry Summers, Adair Turner, Christine Lagarde and so on – say governments should spend it on infrastructure. Certainly, we need infrastructure and this in the long term serves the economy. However, in the real world we find that governments don’t usually make wise choices, it usually wastes the money in one way or the other. So you rather end up wasting the money with expenses rather than improving the infrastructure, that’s point number 1.
Secondly, it can be doubted that even if money is spent on infrastructure, it might not be spent wisely. For that you have to look no further than China, where they report 45% of the GDP of the last 10 years as an investment, but at least half of that has been wasted. I have been to China and have seen that people are upset about this. If you adjust Chinese GDP for reasonable investment versus just flushing money down the toilet, we would take off at least a quarter of their GDP for the last 10 years.
The other variation of helicopter money is that some people such as Jeremy Corbyn in the UK say that one doesn’t even have to spend the money into infrastructure, but that one could just give it to the people by sending everybody a cheque – which is called People’s QE. And actually President Jimmy Carter did something very similar during the 1970’s just to get out of recession: They just sent to everybody 1000-dollar-cheques. So that’s really helicopter money, it’s sending cheques to everybody. But the mainstream view is that it will be spending on infrastructure.
But the latest refinement, which has been discussed by Modern Monetary Theorists, is “Well, why can’t we just spend all the money once and have the central banks monetize it? But you don’t even have to pay off the debt.” So this is the idea from which the so-called ‘perpetual bond’1 has emerged. So now it’s the same thing: Governments run larger deficits, they use the deficit spendings to build infrastructure (if they favor), which in theory keeps the economy moving. You issue debt to cover your deficit, but this debt is perpetual and has no maturity and the central bank simply buys it and puts the securities on its balance sheets forever and ever.
And then I have been in this debate with Modern Monetary Theorists – they just described what I just described to you: basically perpetual debt at close to zero interest rates with the government spending the money to stimulate the economy and the debt that hasn’t to be repaid, as the central bank buys it for printing money and holds it forever. And if you look at that you might say: “Well, what’s wrong with that?” And I’ll throw that question out to the group; I have my own answers. But it’s a question that if we are not going to depend on logical or economic principles and just print money, you do have to be prepared to answer that question: What’s wrong with perpetual debt, helicopter/printed money by the central banks, as this is actually where we are heading?
Now one last thing in terms of how productive this is at the end of the day. I talked about the infrastructure and how that money can be wasted. So this is something that has been advocated, they teach this at universities, say it in the political dialogue, it has a lot of proponents from George Soros, Ben Bernanke, Christine Lagarde etc. – I don’t see many opponents to the mainstream other than Austrians. That’s why helicopter money is definitely coming.
And helicopter money does require coordination with fiscal policies; the monetary authorities, the central banks cannot do it on their own, they need to sync up with the fiscal authority so that the debt is entering and stimulating the economy. But even if you are doing infrastructure spending, we decide whether it’s wasted or not, which I think in many cases it would be, almost by definition: It’s not clear that there’s any Keynesian multipliers associated with that. Yes, if you build an airport, you are going to hire someone to come in and do construction and you are going to buy some cement. But the money paid to those individuals might go straight into savings or paying off debt, paying off credit card, student loans etc.
But I don’t agree with the thesis that money printing definitely causes inflation. I’m not saying money printing doesn’t matter for inflation, but money printing is only one of two ingredients, the other one being the velocity of the turnover of money – such things are crucial, people actually have to spend the money. But velocity is a psychological thing rather than economics. But be that as it may, money printing is certainly one of the ingredients: So you print enough money and put it in enough places, sooner than later psychology will change, the money will be spent and inflation breaks out. So this creates inflationary vectors that offset the deflationary vectors from demography and technology and debt deleveraging, I think we all understand fairly well.
Heinz Blasnik on the question whether helicopter money creates inflation:
I think the question about inflationary and deflationary outcomes is important. I recently discussed it with some friends and one of them said: “If the Bank of Japan really does something like issuing a perpetual bond, isn’t it basically just an accounting operation? Because after all, what we’re doing now is already a form of helicopter money, as they monetize one third of the public debt of the country.” What I replied to that was that the central banks have had a lot of leeway in conducting inflationary experiments because of the deflationary undertow in the system. The banking system is fragile, and the large amount of outstanding debt creates deflationary pressures.
But on the other hand, from the point of view of the public, all of this is still seen as temporary, it’s dealing with the exigencies of the moment – we have a kind of emergency, so the central banks are taking special measures and so on. But somehow at the back of it there is always the implication that one day things are going to be normal again, that all these special measures are going to be taken back one day.
If I recall correctly, Mises said the following:
Inflationary policies can be implemented for a very long time without any consumer price inflation rising, precisely because people expect them to be temporary. And if they tend to have a high demand for money, their cash balances rise, so prices don’t increase. But he also mentioned: Once the public becomes convinced that the inflationary policy is not temporary but permanent, then that is the point at which price inflation begins to take off.
Actually, in his article on helicopter money Ben Bernanke said explicitly, it must be done in such a way that the public knows it’s permanent, that it is a permanent addition to the money supply.The question then is, if they do things like introducing perpetual bonds, where is the psychological threshold at which people really start to spend money such that consumer prices take off? One cannot know where this point is of course. Since most people don’t really understand central bank policies, there is some leeway due to that as well. But there has to be a threshold somewhere and if it is crossed, people will lose confidence in the money issued by the central banks.-----