What is Helicopter money? Can the Fed or ECB just drop money from the sky?
The answer is no, at least legally. As I have explained before, the Fed
cannot provide capital, but it can provide liquidity.
Although central banks show little regard for the rules under which they
operate, they have not resorted to”helicopter money” in any real sense. But
they sure have created bubbles.
Popular Misconception
The above image (and hundreds of similar images), are often used to depict
“helicopter money”.
It’s a popular misconception of what’s really happening.
John Hussman discusses the above ideas in his latest weekly commentary Speculative
Extremes and Historically-Informed Optimism.
Last week, market conditions joined the same tiny handful of extremes that
defined the 1929, 1972, 1987, 2000 and 2007 market peaks. Still, the false
signal near the start of 2014 (and lesser extremes before then), helpless in
the face of single basis-point Treasury bill yields and uniform market
internals, encourages a certain level of humility and flexibility.
The present yield-seeking speculative extreme is likely to be seen in
hindsight as one of the three most reckless financial bubbles in U.S.
history, on par with the 1929 and 2000 extremes. The present market cycle is
likely to be completed by a collapse where a wholly run-of-the-mill outcome
would be a decline of 40-55% in the S&P 500 Index.
One can object; didn’t I incorrectly believe the same thing years ago,
when similarly extreme conditions emerged with no consequence? Yes, I did. In
mid-2014, I imposed conditions related to interest rates and market internals
to avoid an excessive reliance on overvalued, overbought, overbullish
syndromes. But be careful about dismissing historically reliable evidence of
obscene valuations and speculative extremes on the basis of that difficult
narrative. Both a century of history, and our own experience in full market
cycles before the recent half-cycle advance, argue against complacency here.
As for the enticing concept of “helicopter money,” my impression is that
many observers are using the term with no understanding of what they are
talking about. Despite the uninhibited imagery it evokes, “helicopter money”
is nothing but a legislatively-approved fiscal stimulus package, financed by
issuing bonds that are purchased by the central bank. Every country already
does it, but the size is limited to the willingness of a legislature to
pursue deficit spending. Central banks, on their own, can’t “do” helicopter
money without a spending package approved by the legislature. Well, at least
the Federal Reserve can’t under current law. To some extent, Europe and Japan
can do it by purchasing low-quality bonds that subsequently default, but in
that case, it’s a private bailout rather than an economic stimulus. See,
those central banks have resorted to buying lower-tier assets like
asset-backed securities and corporate debt. If any of that debt defaults, the
central bank has given a de facto bailout, with public funds, to the
bondholder who otherwise would have taken a loss. So almost by definition,
low-tier asset purchases by the ECB and Bank of Japan act as publicly-funded
subsidies for bondholders, rather than ordinary citizens. My sense is that if
the European and Japanese public had a better sense of this, they would tear
down both central banks brick-by-brick.
As for the U.S., I’d actually be quite comfortable with a reasonable
amount of “helicopter money” provided that the accompanying fiscal stimulus
package was focused, not on consumption, but on productive investment at the
public, private and individual level (infrastructure, investment and R&D
tax credits, workforce training, education, and so forth). It’s the absence
of productive real investment, which since 2000 has slumped to a small
fraction of its historical growth rate, along with the encouragement of rank
yield-seeking speculation by the Fed, that has repeatedly injured the U.S.
economy, and is likely to insult the economy with further crises before any
durable lessons are learned.
Here and now, really the only factor that mitigates crash risk, and
encourages us to refrain from pounding the tables about immediate market
loss, is that some trend-following components in our measures of market
internals have become constructive during the recent advance, though not
enough – at least as yet – to shift their overall status. In the absence of
stronger mitigating conditions, mirroring the late-2011 to mid-2014 period,
the decision-making of investors should consider the breathtakingly negative
outcomes that have generally followed similarly overvalued, overbought,
overbullish extremes. In any event, don’t allow your decision-making to be
driven by “fear of missing out” at what is already one of the most extreme
points of speculative overvaluation in history.
The current half-cycle market advance is remarkably long-in-the-tooth.
There little basis for investment at these valuations – only speculation.
Helicopter Money for Public Investment
My only disagreement with Hussman in in regards to helicopter money for
public investment.
The US has a debt problem and a spending problem. Instead, I would gladly
cut war-mongering waste for more productive uses.
Yet, that alone is insufficient. We also need to scrap Davis Bacon and all
prevailing wage laws to get the most bang for the buck. Federal and state
projects are way too costly because of union rules.
Mario Draghi on QE for the People
Mario Draghi Answers Questions on Helicopters
Negative Multipliers
If QE and negative interest rates worked, we would not have seen the rise
of Marine Le Pen in France or Beppe Grillo in Italy, Eurozone growth would
not be anemic, Brexit would not have happened, and someone like Donald Trump
never would have won the nomination.
All we have have to show for QE is another massive set of global financial
asset bubbles.
For further discussion, please see Lacy Hunt on Negative Multiplier of Government Debt.
Mike “Mish” Shedlock
