Helicopter Money is flying high again but will it crash and burn?

One of the features of these times is how monetary policies move so quickly from being considered extreme to mainstream. There was a time that zero interest-rates were considered to be not far off “unpossible” yet now we find that there were only a brief stopping point on the way to negative interest-rates and yields. Currently the ECB and Bank of Japan amongst others are pushing the boundaries of QE (Quantitative Easing) style policies with even the latter admitting this is a consequence.

liquidity and functioning of the JGB market have largely declined ( JGB = Japanese Government Bonds)

Or to put it another way the market is essentially now the Japanese government issuing debt and the Bank of Japan buying it. The concept of the price and yield of debt being an economic signal goes flying out of the window at that point.

Whilst such policies are officially a triumph the cry invariably goes up for something extra and that cry has been issued again over the last couple of days.  A group of 18 European Parliamentarians have written to ECB President Mario Draghi asking for a change of policy. From Bloomberg.

Those alternatives would include the introduction of a citizens’ dividend, using “helicopter money”, and the buying of bonds from the European Investment Bond, as possible solutions to enhance economic development through direct spendings into the real economy

By seriously considering these alternative tools the ECB would send a great signal of ambition and commitment.

Apparently expanding your balance sheet to 3.08 trillion Euros and rising at 80 billion a month demonstrates a lack of “ambition and commitment”! I guess so does an interest-rate of -0.4%. Oh and I am surprised at the mention of the European Investment Bank as a new venture as it is already in the QE eligible list under the definition below.

international or supranational institutions located in the euro area

Anyway we move on noting that these lawmakers if they got enough support could break one of the boundaries for helicopter money which is the legal issue. Rather oddly Bank of Japan Governor Kuroda has also raised the legal issues. Why odd? Well as I shall come to later Japan has already given it a go.

Janet Yellen

I find the issue of Janet Yellen of the US Federal Reserve discussing this issue particularly revealing as of course she and her colleagues are supposed to be tightening monetary policy via interest-rate rises or as it has been so far a rise. Form the Wall Street Journal.

“In normal times” there should be a separation between monetary and fiscal policy, she says. Central bank independence — keeping politicians from printing money — keeps inflation stable.

While academics are debating the idea of helicopter money, she says, it would take an “abnormal” and “extreme” situation for it to make sense.

As the current situation is plainly abnormal and more than a few will consider the spread of negative interest-rates and bond yields to be extreme then these barriers may be rather easily hurdled. Janet’s predecessor Ben Bernanke seems somewhat keen too.

it has the attractive feature that it should work even when more conventional monetary policies are ineffective and the initial level of government debt is high.

Are so QE and negative interest rates are conventional now are they?! Anyway his nickname of “Helicopter Ben” I guess gives even casual observers of the state of play a fair clue.

Lunch with the FT

You might be wondering how this is linked apart from obviously the boost to the economy provided by lunch at a restaurant in Mayfair. However I will provide a clue by pointing out that Ben Bernanke described the guest as an “influential advocate”. According to Martin Wolf he can be described thus.

He embodies the international economic and policymaking elite.

A career in finance in spite of the fact he says this.

But I’d forgotten that banks create credit, money and purchasing power.

That is a simply extraordinary statement from the main UK advocate of helicopter money who is Jonathan Adair Turner or Baron Turner of Ecchinnswell if you prefer. Especially from a man who headed up the CBI and FSA. His support for the Euro is a mere bagatelle quickly corrected apparently as we learn one more time that career ending mistakes are for plebs and the hoi polloi only. The higher you climb the greasy pole the less responsible for anything you become.

I think that a comment by 2000AD to the article sums things up rather well.

Nice analogy – Lord Turner is indeed like an “enarque”. Eloquent, polished and well connected, yet shamelessly incompetent and corrupted. This article made me sad.

The establishment is singing along with The Mock Turtles on Helicopter Money.

Can you dig it?
Can you dig it?
Can you dig it?
Can you dig it?

 

UK Retail Sales

Those hammering out a helicopter money beat found the UK data giving them quite a bloody nose yesterday. Helicopter money works as follows. People get it as a type of “free money” and then they spend it and boost the economy via higher consumption. So UK consumption is lacking?

The volume of retail sales in May 2016 is estimated to have increased by 6.0% compared with May 2015.

I don’t know about you but the UK consumer seems to be in rude health and if anything is not it seems set to be the trade deficit. This reinforces again one of my themes as I note a fair bit of this is driven by lower prices.

Average store prices (including petrol stations) fell by 2.8% in May 2016 compared with May 2015.

I raise this issue as lower prices have had provided an economic stimulus via higher real wages as you can see. This matters in itself but also because it is the exact opposite of the “cure” suggested by Turner and Bernanke who are both advocates of inflation being pushed higher and in the former case of raising the inflation target.

Mind you reality and supposed elites and the establishment rarely coincide. Let me remind you of the surge in UK Retail Sales and then this issued by the Bank of England at noon yesterday.

Households could defer consumption

Comment

Back on the 6th of April I looked at the Helicopter Money issue and pointed out that it mostly was produced in the rarefied air to be found at the top of Ivory Tower.

Also the rise of the concept of helicopter money has another problem which is that if things are going as well as we are continually told why do we need it at all?

There is another problem too.

Actually I can make an even more damning critique which is that all this monetary effort harms rather than encourages reform. It has glued the global elites in place and they have no intention of reforming at all.

Adair Turner et al. As we look deeper we also see a problem in the original Milton Friedman definition.

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.

Who could possibly believe the second sentence in that paragraph after what has happened in the credit crunch era?

As we review events any introduction of Helicopter Money now in what we are told is a recovery would be a type of contradiction in terms. How much would it be split between inflation and output growth as we mull the fact it is invariably inflation advocates who propose it. Perhaps the biggest irony of all is that the place which most needs it, Greece with its ongoing economic depression, seems to be the least likely to get it.

Oh and when Japan gave it a go ( £142 per head if I recall correctly) it was mostly saved. Perhaps they did not believe it would be unique and frankly it is hard to blame them.

Me on Share Radio

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20 thoughts on “Helicopter Money is flying high again but will it crash and burn?

  1. hello shaun ,

    I agree , if we need this money why ?

    also we have boosted the lower paid by raising the personal allowance to 12,000 thus boosting the income of the lower classes as they have a greater impact on aggrigate demand.

    perhaps thats reflected in the retail sales

    the brakes though are you cannot afford house or pay back Uni education-
    frankly the policy encourages the bright young things to leave – not good for future taxes

    as for Japan helicopter money perhaps it was too little (!) , I think the UK would love £1000 stimulus checks ! we’d spend spend spend .

    then what ? you havent made the economy any better but increased imports

    the only solution is to make stuff that people want to buy abroad – and we all know absolutely nothing that HMG has done over the past 30/40 years has done anything to help there. At worse they’ve made it even harder -or just encouraged the sales of UK companies to foreign buyers who reap the rewards.

    inflation advocates want it to reduce the absolute burden of the debt pile we have

    silly people

    Forbin

    • Hi Forbin

      So many of the cards are on the table with monetary policy with its pedal close to the floor and in the UK for example we are still running quite a fiscal deficit for a country that has just had a good 3 year run of growth. Yet we always need one more rather than stopping and thinking what the answer is.

      As you point out one of the best things for the Euro area economy might be for the UK to have some Helicopter Money.

      The Japanese were always unlikely to spend the money with their culture. It would be interesting now to re-try it but it would need to come with a national campaign that it was their duty to spend it. I don’t know if it would work but without it they might just save it again.

  2. Hi Shaun

    Great article as always. If they’re going to do helicopter money, they might as well start a citizens income (UK). This would be part funded by a land value tax. Otherwise all that free money would go straight back into property 😉

    • Hi Anteos and thank you

      I was about to reply that some wouldn’t go into property as for an increasing number “there ain’t nothing going on but the rent” but of course that just feeds by to let. There is merit in your idea but the catch is that it is the establishment who would be hit by a land value tax. Some of them are not especially bright but mostly they know what benefits them…

      • The trouble with a land value tax is you are taxing an asset ,not income. So if you have property, but only a fixed income how do you pay the tax ? Generally, tax should only levelled
        on income and only on capital profit as and when it is realised.
        People in the south east might be a bit upset about such a tax and who do they usually vote for?
        .

        • LVT could should replace council tax, 0.5% of value. This wouldn’t be much of a change for the majority of the population.

          I used to live in st johns wood and I was amazed at how low the council tax was. One of the richest parts of london paying less council tax than the poorest part.

  3. If we assume Shaun’s identification of key issues well in advance of them actually happening is accurate, then we are indeed in for [another] unprecedented monetary experiment. I think he’s right, and I also think he has Adair Turner’s number absolutely spot-on.

    • JossB, I would agree with your observation. Shaun is always ahead. Thinsg could get unconvenetional quickly, with the referendum and perhaps Trumpism too. You might quite fast discover our “status quoers” pressing the panic button since they need to keep everything the same on the surface (whilst sacrificing all longterm financial probity). I think it will beinteresting to watch markets next Friday. Paul C.

  4. ‘Or to put it another way the market is essentially now the Japanese government issuing debt and the Bank of Japan buying it. ‘

    The key to good journalism/teaching is taking complex issues and explaining them simply in terms laymen like myself can grasp.

    Good job.

    And as you so rightly point out,if everything is going so swimmingly well,why are we discussing this issue.

    My one hope-and this isn’t a political point really-is that if the people vote Brexit on Thursday next,it’s going to remove a whole layer of places these monetary terrorists can hide and operate.

    Sorry for doing politics Shaun,but I think working class people in the UK have worked out that their best chance of honest governance lies in leaving the EU.

    • Hi Dutch

      It is me that has the outright political bar no-one else. Although I think it works best if mentions are occassional as we saw only yesterday how poisonous it looks as though it can be. Social media gets bogged down with it as well.

      As to Japan they have a serious problem now. They should be booming in response to the lower oil price as i find it hard to think of a bigger winner. But they are not whilst the Tokyo Whale gets larger.

  5. Shaun,people here were very sad and shocked to hear about the murder of Labour MP Jo Cox. It was an incredibly cruel act to deprive her young children of their mother, as that man did.
    I agree with you that the possibility of Brexit probably didn’t play a big role in the US Fed’s decision not to raise the federal funds rate on Wednesday. Chair Yellen didn’t mention it in her opening remarks, but only when she was questioned about it. She’s a polite woman and of course she wasn’t going to say that the US Fed didn’t care much about the UK. By the way, Bank of Canada Governor Stephen Poloz also spoke on Wednesday in Whitehorse. He did mention in his speech that “the outcome of the Brexit referendum next week poses new risks at the global level that could mean a shift in view”. I don’t have any numbers to support it, but I expect that whatever happens to the UK economy is a little bigger deal here than it is in the US.
    In her remarks Janet Yellen said that “core inflation, which excludes energy and food prices, has been running close to 1-1/2 percent.” She was referencing the PCEPILFE, the US Fed’s preferred measure of core inflation, which is only available to April, when the annual inflation rate was 1.6%. If one looks instead at the US Harmonised Index of Consumer Prices for the total US population excluding food and energy, the measure most closely related to UK core CPI, the core inflation rate has gone from 1.68% in April to 1.77% in May, closer to 2.0% than 1.5%. In May 2015, the core inflation rate was just 1.29%. So core inflation is clearly much higher in the US than it is in Britain, or any G-7 country except for Canada, and on a rising trend. I thought that the US Fed would have raised the federal funds rate on Wednesday, and am a little surprised that it didn’t.

    • Hi Andrew and thank you

      Yesterday’s incident has created quite a shockwave over here as you might imagine. Whilst there is gun crime over here it mostly avoids the general population so shootings like that create an impact and of course her circumstances only add to that. Ironically she had been part of the farcical “Battle of the Thames” the day before, where some coverage showed some humour.

      As to the US Federal Reserve I thought a month or two ago that they would raise in June partly because of the electoral timetable and partly because they were so strongly hinting it. Now their credibility has faded as “3 to 5” became 2 and now Bullard says one by 2018!

      As to Brexit well it has at least given the weather a break from being the scapegoat.

  6. zero interest rates, negative interest rates considered impossible. Nigh impossible with an effective market. But we have pension funds legally required to buy these loss making bonds that aren’t risk free. We have central bankers buying bonds at prices previously considered impossible using funny money magicked out of thin air.

    If anybody else did what the central bankers are doing, they would be jailed for counterfeiting, market manipulation and/or plain old fraud. I don’t think it’s going to end well ……

    • Hi ExpatInBG

      I tried to raise this issue in the media this week over the grilling of Phillip Green over the BHS pension shortfall. Or not to put too fine a point on it how much of the claimed deficit is due to lower yields? I wouldn’t be surprised if it was a fair bit. But much easier to report on MPs grandstanding and Phillip Green behaving like well Phillip Green.

      Also there is the forward Guidance of expect higher interest-rates by Mark Carney. How is that going? Imagine if a financial services company had said get mortgages now whilst they are cheap and yields plunged!

      • Yes, I would have thought Green could have mounted a good defence along the lines of low yield on allowed investments..
        However, as you say, Philip Green is….Philip Green, and always up for a ruck!
        Having said which, surely BHS could have survived in a slimmer version with a “makeover” and relaunch.
        Incidentally, yes, Adair Turner….the placeman’s “go to” placeman, who, despite being at the FSA, didn’t fail in his duty during the Lehman debacle…..!

      • pity those people planning a secure working future and retirement from BHS. There is an old phrase about putting all your eggs in 1 basket. GM pension liabilities are huge, will they drag GM uder ?

        The US private pension investment system has advantages, in that you can manage your own retirement funds which your employer cannot raid when times are tough.

        Riskiest of all are the unfunded state pension schemes / ponzi schemes. If the state bankrupts, pensioners will be not get paid enough for basic needs.

  7. I believe I have the answer to all the Establishment’s problems. On the one hand they are upset at the apparent lack of inflation whilst on the other the fret how to increase growth.

    All they have to do is adopt the RPI as an official measure and hey presto! Inflation is around 1.4% which according to the Establishment is required in order to achieve growth. Do they ever see how stupid they look and are?

    On a more serious note helicopter money, targeted at low income families will work short term, as they generally don’t have enough money live on (reference the proliferation of food banks over recent years) and will immediately spend it mostly on essentials. The problem is that once started, the money would have to continue much the same as QE, otherwise the initial stimulus would dissipate over a period of months.

    I really don’t understand why they are talking about helicopter money for the UK, it just isn’t required, unless you’re trying a back door method to increasing inflation but I’ve already provided an overnight solution to that conundrum above. The trouble is, every time I see the Establishment crying for more inflation I can hear the unarticulated assumption that higher inflation = higher wages = higher taxes & NI conts = higher Government revenues = sovereign debt easier to deal with just screaming out.

    Based on post credit crunch experience, the automatic higher wages are a BIG assumption. Given that their real reason for increasing inflation is to make the National debt more affordable why not kill 2 birds with one stone retiring debt owned by the BOE as it matures? Either that or go really radical monetising the whole lot with the attendant moral hazard that would bring..

    • Hi Noo 2 economics
      I agree with most of what you say but
      I would suggest that helicopter money
      by both the lower paid sector and more
      worryingly the middle classes would pay
      back debt with most of it.
      We are all capable of giving more accurate
      statistics and predictions than TPTB but
      clearly accuracy is the last thing they want!
      JRH

      • But the targeted money of which I speak will only be available to low income families at food banks.

        The only way they get to a food bank is via referral from Social Services/charity/church.

        The referral forms are allocated once a means test has been satisfied, therefore these families will spend all the helicopter money on essentials as the very fact they turn up at Food banks demonstrates they have insufficient income to exist – not live, on.

        More generally helicopter money is a short term fix and structural reform of the banks is desperately required of the banks. The National Living Wage is a step in the right direction but the Government needs to ensure it is rigourously enforced with employers not being allowed to game it via reduced hours for employees thereby reducing the unemployment level whilst the Social Security bill remains the same as social payments are made to many part time employees who want to work full time as their par time pay is insufficient and is then topped up by, well, me the tax payer! This represents a further back door subsidy to unscrupulous employers if they are allowed to game it.

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