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
Rome tried helicopter money and it did not end well.
http://money.visualcapitalist.com/currency-and-the-collapse-of-the-roman-empire/
That’s a bit like saying someone who drank themselves to death “tried wine and it didn’t end well”. Yea and so what does that have to do with the merits of having a nice wine for dinner?
Quite a lot.
Government action is self reinforcing. The people hired to oversee and manage the “stimulus”, won’t go up in smoke once it was supposed to be over. And will point to “how well it worked” while it was ongoing. So it will go on. In ever larger quantities. Until the glass of wine for dinner, turns into death.
For a diner who enjoys wine, the knowledge that he has to bear the consequences of over imbibing, puts a damper on his desire to do so. But if he could drink as much as he wanted, while someone else had to pay the bill, suffer the hangover and deal with the risk of excessive intoxication, he’d be pouring the Lafite quite liberally as well.
Rome devalued their currency to worthless and raised land taxes until farmers abandoned their lands. The parallel is the Federal Reserve devalued the dollar over 95% after 1913 and Congress raised taxes until US corporations are abandoning the USA. Consequences in both cases are a collapse of trade, inflation, inability to finance the military, and invasion by Visgoths and Mexicans.
Indeed and those Visigoths mixed with the local population creating what you now refer to as Europe. In this case Spain (Visigothic) but it happened with other Germanic tribes (Franks-France) (Lombard’s-Italy) (Britain-Anglos).
Then as now, those immigrants where considered inferior and fundamentally changed the country. The romans changed from looking like the somewhat tanned short, Mediterranean appearance to more tall, Germanic, light featured.
The ironic this is the emperor let them in thinking he could get more tax revenue and recruited many of them to the Roman army. By 2050 half the population of the U.S. will be of Latino descent a similar changing to the late Roman Empire.
However, these people where Romanized and many of them tried to emulate the Rome they “conquered”. It was not so much an invasion or conquest but a morphing.
Indeed who knows what will happen to the U.S. now? Bad or Good, can’t be said, but different yes.
Gothic Spain was a couple of hundred years at best, enough to justify a ‘reconquest’ by northern Europeans through some remote lineage. I enjoy looking at society through a tribal lense as it wipes away a lot of BS.
Take a ‘Spaniard’, though no typical person really exists due to the historical diversity of the nation, and you might find his ancestors were tribal Iberian natives, who later intermixed fully with Phoenicians and Greeks ( near east), Celts ( central Asia), Jews ( ‘Israel’) , Romans (… Italy), Vandals ( Germanic) Goths ( Swedish origin apparently). Arabs (N. African and Middle East), the Christian Kings after were Austrian/Belgian origin… through all of this there were various purges and resettlements from outside… so from the 1500s on what was left was the more Christian members of local society and an influx of Christian northern Europeans who still have a royalty descended from a certain Belgian tribal chief named Capet. In fact the Arab dynasties controlled Spain/part of Spain for longer than the current kings. Even the Vikings mauraded briefly.
When you read it through like this, it helps in the understanding of the different layers at work, the veneers of tradition, what is simply imposed or shallow, and the confusion that exists. The above is for one country, so you might imagine what it would take to dictate a common future for Europe given that local, and some national, identity is about all that keeps the feet of several hundred million people on the ground … seriously misguided in my opinion, as there is no common meeting place possible for such a rabble, and the days of forcing an identity on others are, we hope, over.
Where is ‘European’ ?
Nowhere but in some imaginary concoction that must remain beyond law to even pretend to exist.
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. John Hussman
Certainly, central banks should not create fiat for the private sector by lending to or asset buying from it because that’s welfare proportional to wealth. Nor should central banks pay interest on reserves for the same reason.
However, a major reason banks are so powerful is the lack of risk-free accounting and transaction services in fiat for ALL citizens, their businesses, etc. Instead, citizens are limited to unsafe, inconvenient physical fiat (aka “cash”) while only depository institutions (aka “banks”) may have accounts at the central bank.
In principle, those risk-free accounting and transaction services in fiat for ALL citizens could be housed in the Treasury Departments of monetary sovereigns but in practice it would be far simpler to simply use existing central banks but with their power to create fiat for the private sector removed.
but with their power to create fiat for the private sector removed. aa
An exception might be the ECB. However, in that case the only fiat creation for the private sector should be via equal distributions to all citizens.
“All we have have to show for QE is another massive set of global financial asset bubbles.”
Absolutely.
I would add that QE (and other current monetary policy) has exacerbated wealth inequality.
In the spirit of honesty, asset bubbles is not all we got. Loans for housing, autos and education are up. Corps that can borrow at the low rates have expanded greatly — a Starbucks on every corner, as one example. The gov is spending a huge deficit, which is 10’s of millions of jobs.
Sure, some of this is wasteful. But it’s better than mass bank failures and homelessness.
Also, in the spirit of honesty, we did have heli money. Remember the Bush tax rebate? Everybody got $300. Even folks who didn’t pay taxes.
MKKBY – oh, yeah, we just couldn’t have “mass bank failures”, and nobody needed to go homeless. In fact, many, many people just stopped paying their mortgage and haven’t done so for years; they’re still living in their houses.
What an absolute crock. Reward the stupid! It’s a backwards, upside down world. The banks essentially went bankrupt, but were bailed out. So were a lot of other idiots.
Some of this was wasteful? Really? Try 99% of it.
So, to get this straight, this guy has developed some unspecified set of measures, which when applied to back dated historical data, correctly correlated with 7 market crashes. Then, the first time he had to use it with current market data in 2014 it failed to predict a crash. Now its 7 out of 8. Not impressed.
Anonymous – the Fed has the market’s back. Every time there’s a whiff of a downturn, in rides the manipulators. What you really ought to be “not impressed” with is the fraudulent engineering and the steering of the markets. Be “not impressed” about that.
Helicopter drop here please. Latitude: 44.603271 Longitude: 0.2390339999999469 if you could organize that Mish, I would be very grateful, thanks.
Central banks buy assets and they buy them in the market. If, for example, the Central Bank is going to buy $5B a month of AAA+ bonds, it buys them in the open market just like a pension fund, a hedge fund, or an individual investor with a brokerage account. Just like other purchases in the financial markets, these are essentially auctions. If you call your broker and say you want to buy $5,000 of stock/bond XYZ, our broker is supposed to buy as many shares/bonds as possible for $5,000. If one guy is selling at $1000 per unit and the other at $2500 per unit, your broker is supposed to buy 5 for you since that is the best price. Ditto for the central bank.
1. Buying some bonds that later default then is not a ‘bailout’. Bonds are traded back and forth in the market so, say, Ford has no idea at any given moment who might own their bonds. If they default on their bonds then their shareholders are wiped out as bondholders essentially become new shareholders and Ford’s assets are sold off. Likewise bonds are written so you cannot have selective defaults. If Ford declares they will default on the 10% of bonds the Fed happens to own, it’s a default for all bondholders who can and will use that ‘selective default’ to force the entire company into bankruptcy. Long story short, whether or not the central bank has purchased your bonds, a default is not a ‘bailout’ for you. A default would be a very painful, very bad thing.
2. One of the main reasons the Fed buys assets rather than just ‘creating money’ is because the Fed and all Central Banks want to be able to go in both directions. It is easy to put money into the economy (step 1 create money, step 2 buy something in the market). Pulling money out of the economy may not be so easy (step 1 sell what you previous purchased or in the case of a bond wait for it to mature and collect the payments made on it but if there’s a default you won’t get any payments or if the price of that asset drops then you can’t sell it for as much as you paid). Even if you buy a very very safe bond, it’s price could still go down a lot if interest rates or inflation rises so even a very low default risk does not mean there’s no problem with a central bank losing its ability to pull cash out of the economy. Central Banks solve this buy trying to buy assets that are both very safe and very short term (like 3 month T-bills or 1 year bonds). If the CB wants to keep cash in the economy, when they mature they just purchase a new bill. If they want to pull cash out it isn’t a long time before maturing bills do the work for them. if they are in a hurry, you can usually sell a short term bill for what you paid for it.
3. Bubbles? Well how exactly does the Central Bank make them? Say the CB is buying $50B of ten year bonds every month but this is a ‘bubble’. It is creating a lot of cash and will produce a lot of inflation over the next decade. Investors are going to say “why should I buy bonds that pay me 0% when I’m sure to get whacked over the next ten years with 9%+ inflation?”. Investors will stop buying those bonds, their price will fall which means their rates will rise. So much for your ‘bubble’. Sure since the CB can print as much money as it wants it could start buying $100B, $200B or whatever it needs to spend to force that particular bond to be at some particular interest rate, but that will just cause all the other bonds in the economy to collapse in price since investors will be even more worried about inflation
Over and over again I read this simplistic idea that QE produces bubbles but I never hear a coherent description of how this is supposed to happen in a market economy among financial assets, the most liquid and rapidly traded of all assets.
Compared to not buying, buying entails bidding higher than the next highest bidder at an auction.
Which resolves to: Compared to not buying, buying increases the price of the asset.
Which makes the asset’s price more bubbly than it would have been if buying had not taken place.
It’s not really that hard. Just basic juggling around of normally sloped supply and demand curves.
Of course, if you just happen to say “I don’t think we’re in a bubble unless prices are twice of what they are today”, no amount of buying will create a bubble. But that’s just your subjective feelings. Nothing worth spending time thinking about.
What’s indisputable is, buying makes a market more bubbly than not buying. Hence, the Fed buying, means the Fed is contributing to blowing a bubble.
You assume supply is fixed, it is not. When the price of gold goes up a lot, people scour their old jewelry and march down to the ‘cash for your gold’ places. If you offer a tick higher for some bonds, then those people who were planning to hold their bonds now have one tick more reason to consider dumping them early into your hands.
There’s no fixed supply assumption in there. All that is required, is an upwardly sloping supply curve as a function of price. Which is the only kind that can ever exist, lest you are aware of universes where the workforce is willing to work harder for free, than if you offered them a trillion a minute each.
Again if the market thinks the central bank creating money will cause inflation, then those holding long term bonds will get nervous. They will start selling and the price of bonds will fall (rates rise). The Central Bank could print more money to counter but QE purchases haven’t been fixing prices but fixed at purchase rates (i.e. $50B a month)…..
So you are not guaranteed rising asset prices.
QE DOES NOT create bubbles. Not always, at least. It creates bubbles in the special case that the economy is already flooded with credit. That is where we happen to be this decade.
Since we are flooded with credit, there aren’t many credit worthy borrowers out there. That means the QE is going to sit on bank balance sheets. They aren’t completely suicidal, so they aren’t going to lend without a likely way to profit.
I’m not clear what ‘awash with credit’ could really mean? I think your model is something like this:
Fed buys up 10 year T-bonds, the price of T-bonds goes up and the interest rate goes down.
People who had 10 year bonds that sold to the Fed now take that money and put it into 10 year corporate bonds. Those prices go up and rates go down.
People who had owned 10 year corporate bonds now put the money into other things like bonds based on credit cards or auto loans. Again those prices go up and rates go down.
Normally at some point this turns into additional demand. Someone who sells their bond off doesn’t put the cash into yet another bond but instead goes out and buys a car or a boat or something like that. OR it could be that some business seeing that rates are going down borrows money and uses it to buy a machine, or expand a building, or upgrade the computers etc.
But what if the Fed buys 10 year T-bonds but the people who sell them do not want to go on a spending spree and at the same time do not trust any investments out there. They think things are very scary in other words. Then maybe those people will leave their cash in the banks resulting in a run up in T-bond prices because the banks then will start fighting with the Fed to park that cash somewhere. Next thing you know you may have negative interest rates since people are willing to take a 1% loss if they *know* they don’t have to worry about a default rather than get a positive gain by lending to, say, Ford or Apple but risk a default.
That doesn’t seem like a bubble to me, though, but a ‘flight to quality’. If people are really nervous then low risk assets become more valuable.
Arguing about whether QE creates a bubble, is pretty fruitless, since there is no set in stone definition of a bubble. All we can say for certain, is that QE, by raising demand for an asset, increases it’s price. Meaning, the market for that asset is in a greater bubble than if QE was nit undertaken. As such, QE does create, or strengthen, bubbles, as compared to not QE.
Err no increasing demand for something doesn’t make it ‘bubbly’. Example, look at corn.
The gov’t subsidizes corn, buys it up causing its price to rise above what it would normally for the benefit of corn farmers.
Has that ever caused a ‘corn bubble’? Banks giving million dollar loans to buy up houses, tear them down and replace them with corn fields? Yuppies growing corn in their back yards? Err no, the price is a bit higher than it otherwise would have been but no self-sustaining bubble.
If you arbitrarily define the price increase in corn as a result of government to be not a bubble, I agree; corn is not in a bubble. Duh!
Farmers are growing more corn, investing more in corn production, than they would have sans subsidy. That means subsidies have created/supported a bubble, compared to not subsidies.
All you really have that is solid, are relative comparisons. Everything else is nothing more than “it’s a bubble I define bubble this and that way, but not if I define it some other way…”
As long as non manipulation is the baseline, all demand stimulus definitionally creates/(contributes to) a bubble.
Defining a bubble as something having a higher price than some imaginary ‘non manipulated’ baseline becomes absurd.
The primary variable controlling unemployment is private debt and its derivatives. Unemployment is the ultimate measure of government performance. 60% black youth unemployment as pointed out by Trump is a disaster laid at the feet of our govt. Most do not equate helicopter money with direct action to reduce private debt. Most imply helicopter money to mean monetized fiscal deficit spending on infrastructure, on war mongering, on bank bail outs, in short anything but directly reducing private debt. So in this way helicopter money won’t work.
After WWII the allied command rendered German private debt null and void because the creditors were mostly ex nazis. The result was a German economic miracle of rapid recovery and growth. Private debt magnitude as percent of GDP above about 100% saps the life out of economies. The derivative (slope) explains (correlation with unemployment .94) current unemployment and GDP growth rate. Both are important because debt growth (slope of debt) cannot stay large and positive forever without some mechanism to write down unpayable debts else total debt to GDP exceeds 100% by too much. (Right now world wide it’s between 175% and 300%). Nothing will improve if we don’t find some way to reduce private debt. Writing it down would work but pain to banks will be enormous and unemployment will soar. Steve Keen type Jubilee will work as aggregate demand is held up while banks see their balance sheets contract. Maybe possible under Trump. No way under Hillary.
“Steve Keen type Jubilee”
Please give a heads up on Jubilee … so I can get my ass(ets) out of the country before you turn the $US into toilet paper.
Hard reset the only solution (if you are interested in keeping currency sound … which I am) outside of ongoing “japanization”.
Hard reset should have happened in 2008. I agree it’s the only way to go, otherwise you end up penalizing the prudent and rewarding the foolhardy.
The new fiat distributed in a “Steve Keen type Jubilee” could be sterilized with asset sales by the central bank so why would the value of the currency fall?
Because the cb would have less credibility wrt inflation-fighting because it would have less assets to soak up reserves? But:
1) Just how much in assets must the central bank have to be credible in that regard? Must it be able to remove every last liability (assuming non-negative cb equity) it has? Thereby completely removing all fiat from the economy? Obviously not.
2) The only proper way to sterilize fiat creation is via taxation by the monetary sovereign anyway since:
a) the central bank should not buy assets from the private sector so it should have none to sell. (Nevertheless, the private assets it does own could be used to sterilize a fiat distribution.)
b) interest paying sovereign debt is welfare proportional to wealth so the central bank should have none of that either nor should it sell any it has.
3) The demand for fiat is artificially low anyway because the population may not use fiat except in the form of unsafe, inconvenient physical fiat. So how about we allow the citizens to have inherently risk-free accounts at the central bank and abolish government-provided deposit insurance? Would that not NECESSITATE* the creation of new fiat so deposits could be moved from the banks to the central bank? To avoid a Great Depression II?
Therefore, why not combine a new, equal fiat distribution to all citizens with the abolition of government-provided deposit insurance and the sale of all private assets by the central bank to maximize the amount of new fiat that can be distributed?
*Assuming all non-sovereign debt is sold by the central bank since the fiat created thereby was not created properly.
“The new fiat distributed in a “Steve Keen type Jubilee” could be sterilized with asset sales by the central bank so why would the value of the currency fall?”
Federal Reserve has a balance sheet. Assets, liabilities and a sliver of capital (around $55 billion).
Currently the balance sheet is $4.5 trillion. The asset side mostly treasury / gse mbs and debt. The liabilities federal reserve notes (digital equivalent) “out there”. The reason QE is not “printing” is because assets held are backed by the full faith of US taxpayer … and assets held can be sold to sop up liquidity. Consequently, inflation held in check.
What assets are you planning to sell? The ones already on balance sheet? Are you suggesting a Jubilee with no new assets purchased to be held by Federal Reserve? That is direct monetization aka “Zimbabwe”
Again. No thanks.
I will take my productive self and assets and leave the US. Enjoy.
What assets are you planning to sell? Tony Bennett
As much as needed but at a risk-free yield of no more than 0% or in the case of government insured assets, the insurance removed and sold to the highest bidder regardless.
Are you suggesting a Jubilee with no new assets purchased to be held by Federal Reserve? Tony Bennett
You got it. Or, if you prefer, the monetary sovereign could print some non-interest paying sovereign debt and sell it to the central bank to finance the fiat give-away.
Then what’s not to like? That no one will want to buy non-interest paying sovereign debt so it can’t be used for sterilization? But investors have already paid negative interest rates for the sovereign debt of some countries!
Besides, like I said, taxation by the monetary sovereign is the proper way to sterilize as much fiat creation as is deemed desirable, not the disguised welfare for the rich we’ve had.
“You got it”
You are forgetting the currency component. Until we’re in a closed system (1 world currency) any country doing this will see their currency shredded in the fx market.
No thanks.
any country doing this will see their currency shredded in the fx market. Tony Bennett
On one hand, the elimination of positive interest paying sovereign debt would tend to lower the foreign exchange value of a monetary sovereign’s fiat.
But otoh, the elimination of all privileges for depository institutions (a.k.a “banks’) would tend to raise interest rates in fiat and thus tend to raise the foreign exchange value of a monetary sovereign’s fiat.
Moreover, the stimulative effects of a deflation-free debt Jubilee (e.g. Steve Keen’s “A Modern Jubilee” ) could easily trigger additional demand and eligibility for new loans and thus further increase the foreign exchange value of a monetary sovereign’s fiat.
Capital flight is a “paper tiger”. With the dividend and discount policies in effect and if the dividend was big enough there wouldn’t be a single producer domestic or international that wouldn’t move heaven and earth to sell their products in the US. And as I said with a sufficient dividend and deflationary discount re-industrialization could rapidly make us not only nearly completely self sufficient, but also more technologically modern and efficient self sufficiency than any other country as well. Also, we have most of the commodities necessary for domestic production and already import anything necessary for defense production so no big deal.
What we need to do is tell the international agencies who would claim our economy was in anyway less creditable to go f%#k themselves, and if anyone who wanted to move their money or production over seas….let the idiots go.
A strong and growing economy trumps all other considerations. People point to Argentina and Zimbabwe as cautionary tales of bad monetary and fiscal policy. If you have corruption and punitive confiscation of property from your middle class the weak economy and collapse in output you suffer will be your main problems and insane monetary and fiscal policy will be symptoms not causes of the weak economy. Many pundits make this mistake. Many are making that mistake here in this thread.
Are you suggesting a Jubilee with no new assets purchased to be held by Federal Reserve? Tony Bennett
The problem is to avoid welfare for the rich, which positive interest paying sovereign debt certainly is. Otoh, the central bank should maintain positive equity, I’ll concede at least for the sake of argument, to maintain its inflation-fighting credibility.
So how about this? At Treasury auctions the minimum acceptable bid price is set to yield 0%*. Any unsold sovereign bonds are then sold directly to the central bank at, say, a price yielding 7% or so.
Then what’s not to like since no welfare*** for the rich plus an increase in central bank equity?
*But why would anyone accept a yield of no more than 0% on sovereign debt? Ans: Because the central bank should charge negative** interest on its liabilities/deposits is why and 0% beats negative%.
**Exceptions would include individual citizen accounts at the central bank. These would not be charged interest on the first, say, $250,000. And the monetary sovereign’s account should be exempt.
***Unless the central bank resells those sovereign bonds at a yield of more than 0%. Hopefully, this can be avoided.
Correction:
…plus an increase in central bank equity?aa
Should read:
…plus no decrease in central bank equity?
There is very, very little difference between what Mish (and Hussman) describe as “helicopter money” and what the ECB, Fed and BOJ are doing right now.
The only difference is that the Primary Dealers are currently being used as “middlemen”. They hold the newly issued debt for a short while, before passing it on (usually at a profit) to the Central Bank in exchange for a reserve account credit.
IMHO, that is not much of a difference.
Only difference is that now it is channelled to certain ends, with true helicopter money it is rained down over the whole country… and anyone short of a buck heads off into the country to find some. More fun than digging trenches and filling them in again, and no boss, so bound to be popular.
“Buying some bonds that later default then is not a ‘bailout’.”
Reread that Hussman passage. Said it would be a bailout of bondholders – not the issuer – who would otherwise be holding them (SOMEONE has to be holding EVERY security at EVERY moment in time).
One of many problems with current monetary policy – the complete mispricing of risk. With everyone thinking central banks will buy whatever, whenever … has led to most (all?) assets held privately (not to mention held by central banks) to be inflated. When the jig up (market participants realize central banks can’t / won’t buy “it all”) funds all of all sorts will crash as risk repriced.
What an absolute mess they’ve created.
meant to reply under Brian
Not really. Suppose I sold my shares of Enron before it collapsed. Did those unwise people who purchased my shares ‘bail’ me out? I suppose in a sense but then again not really.
If the Fed owns 40% of Ford’s bonds and Ford defaults, then the Fed’s bonds are worthless as well as the other 60% held by everyone else. In what sense has either Ford or Ford’s bondholders been bailed out? Such a default would be a disaster for anyone holding stock or bonds in Ford…..it would only not be an issue for those who saw it coming and sold before. But that would apply to ANY case of default!
You can only get a bailout if the Fed said something like “OK Ford, issue a special line of bonds…we will buy it for $10B but then you immediately turn around and declare you will default on them….we will not force you into bankruptcy or seize your assets like a bondholder normally would”.
If FR did not own the 40% of Ford bonds – someone (private) would take the loss. But the loss exaggerated for the 60% private bondholders, as well. As you noted they are traded on the open market right up till default (if it were to occur). The mispricing of risk has led to those bonds trading much higher than without Federal Reserve (or other central bank) putting a bid / floor in.
Your brother-in-law Larry is a deadbeat but he came up with an idea. He’s working this contract that will pay him $1000 at the end of the month. He wrote up ten cards that say “I O U $100” and sold them to the chums down the pub. They paid $90 for them and they buy and sell them between themselves. They are a big gullible so now the price is up to $95 because the month is getting close to the end and they hear and see all is going well with the construction contract.
Perhaps some foolish guy buys 6 of these papers for $99 each. The price on the 4 remaining goes up to $97. You, however, know Larry is a deadbeat. He has so many judgments and liens on him that even if he does get paid $1000 he isn’t going to honor those ‘bonds’. You come up with a plan. You go to the 4 holders and tell them to ‘loan’ you their bonds for $5 each. You’ll buy back the bonds the day before they are due. You borrow the 4 bonds, sell them to the foolish for $388 ($97*4). A few days before Larry skips town and people realize he won’t be making good. The price of the ‘Larry bond’ drops to $0. You now ‘buy back’ four of those bonds for $1. You’ve now made a nice lump selling these crappy bonds short.
There’s no ‘mispricing’ here even if you get some fool in the market. At the end of the day the ‘price’ is based on whether or not you think the bond will pay off and to the degree some non-serious buyer is in the market with a different agenda all that happens is your opportunity for profit via shorting goes up.
Of course the Central Bank in real life isn’t buying Ford bonds. Assuming they buying baskets of bonds weighted as good quality by the rating agencies. Ford is in competition with every other company that issues bonds so they aren’t directly helped. If Ford starts to look like it will collapse, its ratings will go down and it will get shut out of the basket of ‘low risk bonds’ while other companies who are doing better will be able to get in.
Unless the Fed is just printing money and giving it to Ford, being able to borrow doesn’t change the fact that Ford needs to sell cars for more than it spends to make them or else it’s viability will be in danger.
“Assuming they buying baskets of bonds weighted as good quality by the rating agencies. Ford is in competition with every other company that issues bonds so they aren’t directly helped.”
Article 14 of Federal Reserve Act states CLEARLY what Federal Reserve is permitted to buy.
And corporate debt not allowed, but “Fords” of the world do benefit as investors have bid up “Ford” bonds in search of yield (as Federal Reserve bought on open market – from investors – high quality debt backed by full faith of US taxpayer)
Risk – across the board – has been mispriced … writ large
Fair point that the Fed isn’t allowed to buy corporate bonds directly. It is allowed to buy high quality asset backed bonds….so perhaps it could buy bonds that are made out of a basket of auto loans rated high quality…some of which would no doubt be Fords for sale.
But I don’t think this matters to our discussion. You argue that investors ‘in search of yield’ could create a Ford bubble even though Ford might be heading for default. But what is yield to an investor? It’s how much they get back over what they put in. If the yield is -1% that means I put out $100 and get back $99.
What’s my yield on ‘Larry bonds”? -100%. I put out $100 (or whatever the price of the bond is) and at the end of the month Larry stiff’s me so my loss is -100%. So if I am ‘searching for yield’ why does Larry suddenly get more attractive to me as an investor?
This is what you guys don’t seem to explain with your ‘QE makes bubbles’ assertions. If Ford is going to default, then low interest rates aren’t going to help make Ford more attractive to lend too. I’d rather get nothing than lose everything.
Perhaps low rates will mean more people will buy cars which would make Ford less risky to lend too. But that isn’t a bubble for Ford, improved Ford sales would indeed lessen the risk of lending to Ford.
“But I don’t think this matters to our discussion.”
I’m glad you mentioned negative yield. Globally, over $10 trillion in (high quality) debt with negative yield.
Why on earth would an investor pay for an asset with negative yield?!?
Some likely due to front running central banks and hope for currency appreciation (but QE by central bank in currency of debt denominated in will likely lower currency) … what possibly could it be OTHER THAN MISPRICE OF RISK?
Investors can take “comfort” in losing only 1% rather than much more in other assets when the reset occurs … and it will.
The game* will continue as long as investors believe central banks will prop everything and anything. Sooner or later someone won’t get paid … and the repricing will occur.
*elections have a way of changing things … if Trump elected??
Why have a negative yield? Well negative yields are the norm in nature. A squirrel saves nuts for the winter but he will always end up with fewer nuts than he put away. At best he can hope for 0% return but will probably get negative.
Anyone who keeps money in a personal safe has automatically embraced a negative rate of return.
But this doesn’t explain your assertion about bubbles or mispricing. A squirrel, despite negative rates, will still seek to store the nuts in the safest place possible. Even though you get a negative return on cash in a safe you still lock the safe. Why would low or even negative rates cause you to misprice the danger of, say, loaning money to Larry?
“Anyone who keeps money in a personal safe has automatically embraced a negative rate of return.”
Really?
More like utter nonsense on your part. Deflation on tap. Cash will be King. But feel free to PROVE your point that it “automatically embraced a negative rate of return”
“Why would low or even negative rates cause you to misprice the danger of, say, loaning money to Larry?”
from above:
“The game* will continue as long as investors believe central banks will prop everything and anything. Sooner or later someone won’t get paid … and the repricing will occur.”
Now I do agree with your point about that low / negative rates not necessarily a mispricing of risk (because of deflationary forces at hand) if no thumb on the scale by central banks….ie: rates solely determined by open market forces.
“The game* will continue as long as investors believe central banks will prop everything and anything. ”
Again how does this make it sensible to loan your money to Larry? House prices crashed, the Fed lowered rates and printed a huge amount of money. Does that mean they propped you up if you were long on mortgages or real estate when the crash came? Tell that to the shareholders of Lehmann. Even if there’s massive attempts by the central bank to get the economy to recover by printing lots of money in the face of a massive financial collapse, as an individual you are still smarter off *not* being in the asset that’s about to collapse.
“Again how does this make it sensible to loan your money to Larry?”
Why not in current system?
As a lender I get a cut off the top which I pocket (never have to worry about clawbacks). Then in today’s world of financialization I bundle the loans and securitize them. Get a bond agency to stamp them AAA (oh, and if you don’t … good luck getting my business again) and peddle them off on rubes (pensions, institutional investors, SWFs, etc). Larry’s loan gets spread around the globe … and investors think central banks will buy Larry’s loan (the security in question) before allowing the rubes to fail …. lest risk “staring into the abyss”.
It works … until it doesn’t (when someone doesn’t get paid)
Then risk gets repriced.
“As a lender I get a cut off the top which I pocket (never have to worry about clawbacks). Then in today’s world of financialization I bundle the loans and securitize them. …”
This has nothing to do with low interest rates. If you pay your loan officer by giving him a cut of all the loans he makes then you are providing the incentive for him to make bad loans.
If you buy bundles of loans, then you should be adjusting the price you are willing to pay if those loans were derived from people who were paid to make them regardless of quality.
You are just pushing my Larry issue around without confronting it. If interest rates are high or low loan officers with bad incentives will have reason to make a bad loan to Larry. So what? Your contention was that low rates causes a ‘search for yield’ that somehow makes Larry more attractive than he would be in a world with higher rates.
Sorry that’s BS. If interest rates were 10% instead of -1% finance people would still be pressured to find better yields. “Why am I paying you for 10% returns when I can get that by just putting my money in a savings account, bring me 13%-15% returns dammit!” Even in that world the Larry’s will be tempting but investors who know what they are doing should realize the ‘yield’ he offers comes with added risk.
“Helicopter money” in fhe Keynsian context which we do in fact live under and have since 1933 is the theory that monetizing the debt will deflate the dollar, cause inflation, infer through devalued dollars credit extension (putting carry into the yield curve) then ultimately stimulating growth, job creation, production, etc.
None of this has happened as the theory is total bs.
All the money has been funneled into debt creation…both in the private sector in the form of ultra low interest rates for Banks and in the form of massive Government spending via borrowing…both of which kill demand. Something anyone who has been long coal, oil, natural gas, refined product, pricing power, etc now knows.
The only “inflation”has been the Government rate charge to the taxpayer.
There has been no “transmission” from the Federal largesse to the economy at large that has moved the needle on growth one bit.
Yes a second Great Depression has been avoided…but this is no economic boom.
Would appear quite the opposite actually.
“All the money has been funneled into debt creation…both in the private sector in the form of ultra low interest rates for Banks and in the form of massive Government spending via borrowing…both of which kill demand. Something anyone who has been long coal, oil, natural gas, refined product, pricing power, etc now knows.”
How exactly does gov’t borrowing and spending kill demand?
Because it deflates the dollar. Prices rise, asset prices rise. People with money stop spending so much because of this. People who have borrowed then lose their jobs and can’t pay their loans back. Vicious circle, and all caused by those who do not want to take their medicine – a hard reset.
Prices rise, those who make things sell them for more per unit than they made before. So why do they suddenly become unable to pay back their loans and lose their jobs again?
Central banks love pointing out that profits do not acrue to their private owners but rather are remitted to the treasury. This gate however swings both ways. Realized losses at the central bank are in fact remitted to treasury in the same way. For a while central banks can avoid realizing losses by floating liquidity to the very issuers who would be defaulting if the CB did not float them more cash. This is the CB version of extend and pretend which has been going on for a long time. It can go on a lot longer. None of this will produce real growth or reduce unemployment. We now have the main function of government is propping up a Potemkin village of banks, insurers, pension funds, state governments, and sovereign governments world wide. This can go on indefinitely but we will suffer increasingly over here in the real world.
there’s nothing more that I would like to see then the war budget cut out from under those companies involved. Hardly a couple of percent of that was really needed as defense. I’ll stick with Lacy Hunt’s ingenious rule, “If an investment does not produce an income stream, it’s nothing more than malinvestment”. Damn, that’s really the pinnacle of investment wisdom.
@Mish — “As I have explained before, the Fed cannot provide capital, but it can provide liquidity.”
Not true. The Fed provided all the “capital” (such as it was) for the three Maiden Lane companies — each of them an off balance sheet financing vehicle owned by the Fed.
“Although central banks show little regard for the rules under which they operate, they have not resorted to”helicopter money” in any real sense.”
The president doesn’t obey the law (Clinton, Bush, Obama), Congress doesn’t obey the law, the Attorney Generals (Alberto Gonzales, Eric Holder), the IRS doesn’t obey the law (Louis Lerner), and the FBI director doesn’t even obey basic logic or the law…
So expecting a clueless clown like Yellen to obey the law seems a bit unreasonable.
She and Bernanke didn’t literally throw money out of helicopters, but yes, they provided capital for Fed sponsored entities, and for “private” banks that did not survive the 2008 bubble pop on their own merits.
The big question is why does anyone else have to obey laws that public servants knowingly and deliberately ingore?
… deliberately “IGNORE” (spelling)
Actually, while recent presidents have ignored many laws — the Obama regime seems particularly unable to appoint anyone who obeys US law:
http://www.hoover.org/research/alphabet-soup-corruption
An honest assessment of the economy shows that there is a chronic scarcity of individual incomes in ratio to costs, largely because of the costs of depreciation and waste that must be charged into consumer prices on a continuing basis. Hence “helicopter money” is necessary if the economy is to be able to be in equilibrium, and a reduction to prices at retail is necessary if it is to remain free flowing.
Any claim that the economy would become wasteful or mal-investment become a problem is simply non-thinking orthodoxy because if the underwriters of investment banking would do their jobs and not fund 5 nail salons in every strip mall and the credit card companies would not be allowed to entice everyone and their dog’s uncle with “tickler rates” until we had another 2008 event then we’d have an economy that sang grand opera 24/7 on all 20 trillion cylinders.
Or you can refuse to be ignorant of cost accounting, refuse to look at the private monopoly on credit creation and turn an equally blind eye to the fact that AI is going to eliminate aggregate demand 10 times faster than it has ever done so before and make the above policies necessary anyway.
You’re all nascent Social Crediters and advocates of Wisdomics/Gracenomics.
wisdomicsblog.com
This is one of the most fascinating set of comments. Kudos to all!
“helicopter money” is nothing but a legislatively-approved fiscal stimulus package, financed by issuing bonds.” Hussman got that right. Warmed-over Keynesian money creation vomit, this mix of QE and USA.gov pork barrel spending.
Orwellian doublespeak at its finest at the Goldman-Sachs web site, calling “helicopter money” an “out-of-the-box approach.” Allison Nathan, senior strategist for Goldman Sachs Research [sorry, my link pasting not working, keeps changing]: “Nearly eight years after the onset of the global financial crisis, growth and inflation in the major developed economies remain tepid despite generally aggressive central bank action. With even unconventional policy measures like negative interest rates seemingly coming up short, out-of-the-box approaches are starting to gain focus, especially the concept of “helicopter money”— a form of monetary finance, whereby the central bank finances fiscal stimulus through money creation”
John Law or Ponzi could have dressed it up better. Like Obama’s “shovel-ready” infrastructure project funding of 2008, which was a hoax, as is most infrastructure, job training and education spending. Of course DoE says student debt (education spending) is good and we need more of it, along with more layers of administrative bureaucracy to administer new laws, rules and regulations. Economic propaganda has a purpose, to join USA.gov’s chopper money gravy train leaving Pork Barrel Station soon.
Printing is confiscation. It doesn’t matter what Mario does with the money, it only matters that he is taking goods away from the people.
How exactly?
“If QE and negative interest rates worked…”
It worked for the top 1% of the top 1%. Jamie Dimon is a billionaire.