World Slides Deeper into the Dangerous "Helicopter Money" Delusion
Interest-Rates / Quantitative Easing Dec 03, 2014 - 12:03 PM GMTBy: Money_Morning
Peter Krauth writes: If it seems to you that central banks and government leaders have run out of ideas, you're not totally wrong.
Indeed, the latest move by Japan smacks of pure desperation, and it might seem silly if it wasn't already an idea that's been floated before.
In fact, we may yet have the chance to see "helicopter money" and its effects after all.
The whole thing is so sad, it's almost funny. Almost.
But like too many crazy ideas, desperate people may be inclined to try anything…
This "Straight from the Lab" Idea Is Pure Poison
Just a few short months ago I raised my eyebrows over an article that appeared in Foreign Affairs, published by the Council on Foreign Relations.
It was a piece titled "Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People" by Mark Blyth and Eric Lonergan.
Blyth and Lonergan recommend a completely new approach to economic stimulation: Have the Fed create cash, and deposit it directly into people's bank accounts.
I took one long look at the idea, gasped at its simplistic, silly approach to the world's economic problems, and tucked it away in the "not going to happen" rhetoric category.
But hold on a minute…
It now looks like Japan's Prime Minister Shinzō Abe's been reading Foreign Affairs, and is ready to try pretty much anything – and I mean anything – to end deflation.
Japan recently slipped back in to recession in Q2 and Q3, indeed its fourth recession since the financial crisis began, despite massive QE that makes the U.S. Fed look downright conservative in that department.
Abe is stuck, and he knows it. That's why he's just called a snap election two years ahead of time.
He wants to delay a new consumption tax increase, hoping it will help the world's third-largest economy claw its way out of 15 years of deflation.
But that's not all…
Abe has now moved what he hopes will be a cure from the lab straight to market.
According to Japan's News47, Abe instructed some of his ministries to develop new economic measures whereby local governments will hand out vouchers, such as gift certificates, to the poor to "support personal consumption directly."
This is exactly what Blyth and Lonergan suggested, and given the state of government finances globally, it was bound to happen. It was only a question of when.
So now Japan will remain the one to watch, as it's the zombie economy that's the farthest along with this extend-and-pretend approach that's going to end in tears.
After two decades of no growth, worsening demographics, and exploding public debt, Japan could well turn out to be the proverbial canary in the coal mine.
They're not alone…
The U.S.'s Significant Monetary Advantages Matter
With one finger ready on the printing press, the European Central Bank's Mario Draghi is not far behind Japan.
Draghi keeps assuring us he'll do whatever is necessary "…to raise inflation and inflation expectations as fast as possible." Right now, Eurozone inflation is an anemic 0.4%.
The problem is that Draghi's $1 trillion QE promise (or threat, depending on your viewpoint) is wearing thin, as German policymakers maintain their staunch opposition to money-printing schemes.
But when push comes to shove, Draghi will get his way.
ECB purchases of asset-backed securities and covered bonds have been ineffective, and some believe QE would accomplish little given that Eurozone sovereign borrowing rates have hit record lows.
It doesn't help either that Europe's biggest trading partner, China, is also exhibiting economic slowing.
This, in turn, has spurred the Chinese Central Bank to cut its benchmark interest rates for the first time in over two years to stimulate its own economy.
Everyone, it seems, wants to emulate the "American Experience."
Yellen announced in mid-October that the Fed's bond-purchase program was ending. So the Fed's done with its money printing, or so many think.
The market's still getting its "fix" from extended low rates, which I wouldn't be surprised to see stretched well beyond 2015, if the Fed can manage it.
The rest of the world wants to do what the Fed did, hoping it will succeed for them as they think it has in the United States.
Thing is, it's only a mirage, as the U.S. maintains two critical distinctions:
Problem No. 1: The United States has and prints the world's reserve fiat currency, an unmatchable advantage.
Problem No. 2: Stocks are way up, but inflation and jobs have nearly stood still at a cost of $4 trillion in new debt!
You'd think by now the Fed would have learned from the "Japanese Experience."
But you'd be wrong.
After Yellen's announcement two regional Fed presidents, John Williams of San Francisco and James Bullard of St. Louis, countered expectations for the Fed to take its foot off the gas.
Then Japan's central bank committed to purchase all the bonds its government would issue, meaning QE forever. Further upping the ante, the Japanese national pension fund, the world's largest institutional investor, promised to place half its assets into stocks.
Apparently, not even the Japanese have learned from their own lost decades…
Here's the Best Move to Hedge Our Bets
So here we are: Japan way ahead on the printing curve, the U.S. on it, and Europe and China doing their best to get there.
Mainstream analysts and economists keep forecasting growth is around the corner, something they've already been saying for the past several years.
And while U.S. markets keeps rising, the economy simply isn't.
Even if it eventually does, the time will come when there's no more "cheap money" punch left to refill the bowl.
This all smacks of complete desperation; central planners repeatedly assert that if QE hasn't worked yet, it's simply because there hasn't been enough.
There's little doubt anymore that this will all end badly. The only question is exactly when.
According to Deutsche Bank's Jim Reid, as reported by zerohedge.com, "I had a few meetings yesterday and one of the biggest surprises I had was that for the first time in a long time people were talking about helicopter money and debt cancellation being the end game."
You don't say, Jim.
If Abe gets reelected prime minister with Haruhiko Kuroda as central bank governor, (or perhaps "helicopter pilot") and starts handing out "money for nothing," we may not have to wait that long to find out.
The upshot is: You don't have to be a victim.
Instead, be your own central bank. Own hard assets like gold, silver, and real estate. Maintain liquidity and yes, even some equities with a firm trailing stop to protect your profits.
Prepare for what will likely become the bargains of a lifetime. That will be your cue to get greedy while everyone else is afraid.
And then you'll be able to go out and spend your very own gift cards. The difference will be that you'll have earned them.
Money Morning/The Money Map Report
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