“Central Banks Should Give Money Directly To The
People” – Gold Bullish CFR Proposal
Helicopter Janet?
Last week, a very radical proposal appeared in the pages
of the influential ‘Foreign Affairs’ magazine, the publication arm of the
equally influential Council on Foreign Relations (CFR) think-tank based in
New York.
An article “Print Less but Transfer More - Why Central
Banks Should Give Money Directly to the People”, that has been picked up
widely in the media argues that given that monetary stimulus measures such as
quantitative easing and near zero central bank interest rates have failed to
boost economic growth, a new radical monetary approach is needed.
That approach is to print currency and give the cash directly to consumers
and households as required so as to remedy insufficient consumer spending and
in order to prevent recessions.
The article is authored by Mark Blyth and Eric Lonergan.
Blyth, originally from Scotland, is an economist at Brown University in Rhode
Island. Lonergan, originally from Ireland, is a fund manager of global macro
strategies at M&G Investments in London.
Although ‘Foreign Affairs’ publishes various sides of
important debates, policy articles in ‘Foreign Affairs’ have tended to
influence US economic and political policy over the years, so the ‘cash
transfer proposal’ is worth watching.
Hoped For Benefits Of "Free Cash"
Blyth and Lonergan argue that the slow economic growth and low inflation
rates being currently witnessed in Western developed economies call for more
extreme government and policy maker approaches so as to get people spending
again, thereby stimulating economic growth and encouraging inflation.
To them, deflation is a key threat that the
unconventional low interest rates and quantitative easing has not managed to
tackle. Therefore in their eyes this needs to be countered by directly making
consumers spend more by actually handing over cash to them.
Blyth and Lonergan draw on Ben Bernanke and Milton
Friedman to support their cash transfer argument and openly say that it is
now “well past time” for policy makers in the US and also in other developed
countries to try the helicopter cash drop approach.
Helicopter Mark?
In 1998, after Japan suffered a lost decade of growth,
Ben Bernanke, a then university economist at Princeton, advocated that Japan
provide direct cash transfers to consumers in order to encourage them to
spend more.
Previously, Milton Friedman had viewed direct money transfers as analogous to
dropping cash from helicopters. This would go on to create the famous
expression of Helicopter Ben (Bernanke) dropping cash from a helicopter.
Blyth and Lonergan advocate direct cash transfers either
to all households equally, or possibly just to the lowest 80% of households.
They say that lower income households would use this cash in a variety of
ways, either to repay consumer debt, or to spend and consume, or to save. If
a certain cash sum, say $1000, was not seen to be effective, households
could, in their view, be given more, for example $3000 or $4000.
Blyth and Lonergan say that it’s hard to measure the
direct impact on consumer spending of instruments such as lower interest
rates, but that the impact of direct cash transfers are more measurable.
In their view, inflation won’t be an issue since central
banks can continue inflation targeting.
Real Risks Of “Free Cash”
However, in our view, there are a number of flaws with this proposal.
Direct cash transfers have a danger of putting consumers further into debt.
If a cash transfer is not effective, and an even bigger transfer is then
handed out by governments, this will create the danger of consumer dependency
on the cash transfer mechanism.
Helicopter Mario?
The argument that the level of inflation created by cash
transfers can be controlled is untested. Since this direct cash transfer
approach has never been used, it is in uncharted territory and could lead to
unanticipated inflation. How the measurement of direct cash transfers is more
accurate than the measurement of the effect of low interest rates and
quantitative easing is unclear.
With economies already facing record money supply growth
from expanded central bank balance sheets, new cash transfers flowing into
the global economy could lead to an out of control velocity of money and
possible hyperinflation. How would this extra liquidity ever be drained from
the system again?
This new cash transfer money would also be printed out of
thin air, thus diluting the existing money supply and eroding its purchasing
power. Since all fiat currency is merely debt anyway, the creation of new
money to finance the direct cash transfers would add to the existing debt
burden of already struggling nation states.
GoldCore Conclusion
In many austerity hit countries, there are is an increasing tax burden with
very high income taxes, sales taxes and many stealth taxes.
Does it make sense for central banks to be printing money
that will in many cases be used to pay taxes, stealth taxes or even pay down
credit card, loan and even mortgage debt?
This measure will likely further worsen the debt to GDP
ratios in many already indebted industrial nations. With interest rates set
to rise in the coming months and years, giving free money to consumers may
bankrupt already vulnerable states.
Would it not be more prudent to have debt write offs and
debt forgiveness at sovereign level so that countries can lower the tax
burden on suffering citizens? Rather than compounding the problem by
increasing sovereign debt levels through giving out "free" cash to
indebted consumers?
There is a real risk that this could end up being another
‘soft bail-out’ for banks as much of the cash would probably end up being
used to pay down the huge debts incurred in recent years and would come
full circle to banks in the form of debt repayments and governments in the
form of taxes.
The real solution to the global debt crisis is not more
debt in the form of “free currency” and increasing sovereign debt. The real
solution remains to implement significant debt forgiveness for consumers and
debt restructuring for institutions, banks and nations in a modern debt
jubilee.
Were such an extreme scenario to be implemented and a
further and deliberate debasement of currency, there is a real risk of
significant inflation and stagflation. Even hyperinflation in a worst case
scenario.
Alan Greenspan’s warning of “fiat money in extremis” becomes more real by the
day. This underlines the vital importance of having an allocation to gold in
a diversified portfolio.
Gold will maintain its purchasing power in the coming
years, as it has always done throughout history.
by Ronan Manly, GoldCore Consultant. Editor Mark
O’Byrne of GoldCore
Sources available on request - info@goldcore.com
MARKET UPDATE
Today’s AM fix was USD 1,285.75, EUR 975.83 and GBP 774.55 per ounce.
Yesterday’s AM fix was USD 1,288.00, EUR 975.54 and GBP 776.28 per ounce.
Gold rose $7.30 or 0.6% to $1,289.30 per ounce and silver
rose $0.09 or 0.4% to $19.53 per ounce yesterday. Overnight, gold in Singapore was flat and stayed near the $1,290/oz level prior to ticking
lower in London.
Silver in U.S. Dollars - 2 Years (Thomson Reuters)
Silver for immediate delivery advanced 0.2 percent to
$19.5525 an ounce. Silver looks set to end six weeks of losses. The
gold/silver ratio is at 65.9 ( 1285.00/19.50 ) and near a one year high
showing silver remains very good value versus gold. We expect the gold silver
ratio to test the 30 level again in the coming years (see chart below).
Gold Silver Ratio - Annually 1995 to 2014 (Thomson Reuters)
Spot platinum was at $1,425.18 an ounce from $1,424.50,
heading for the first back-to-back monthly drop since June 2013. Palladium
was little changed at $896.90 an ounce and is set for a seventh month of
gains as supply and demand impacts the market. Palladium remains near record
13 year nominal highs.
Gold has risen 0.3% this week and a fourth day of
advances would be the longest rally since June. If gold closes above
$1,282/oz today it will be a higher monthly close for August which will be
positive as we had into gold's seasonal sweet spot and gold’s strongest month September.
Gold has bounced from a two-month low of $1,273.14 on
August 21 due to the renewed geopolitical tension as the U.S. condemned what
they said were incursions by Russia into Ukrainian territory.Gold remains on
course to end two weeks of losses, as escalating tension between NATO and
Russia and other geopolitical risks lead to safe haven demand.
Gold in U.S. Dollars - 1 Year (Thomson Reuters)
The United States openly accused Russia yesterday of
sending combat forces into Ukraine and threatened to tighten economic
sanctions, but Washington stopped short of calling Moscow's intensified
support for separatist forces an invasion.
Militants fighting the Syrian army have detained 43 U.N. peacekeepers in the
Israeli occupied Golan Heights and trapped another 81 in the region, and the
world body is working to secure their release, the United Nations said
overnight
A truce between Israel and Gaza’s militant Hamas rulers
was maintained for a third day yesterday, while President Barack Obama
signaled there are no immediate plans to conduct airstrikes against Islamic
State havens inside Syria and a strategy for confronting the group outside
Iraq hasn’t been set.
Gold's small gains amid unrest in the Middle East and
Ukraine have surprised many analysts.
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