The Bank of England has its Ways and Means

Today my home country the UK is back in the focus of economics and in several ways. The first returns me to my article of Monday when I pointed out this.

Let me finish off on the subject of monetary financing. The simple truth is that we have an implicit form of it right now. Why is the currency not collapsing? Because nearly everyone else is at it too!

This was on my mind this morning as I noted the announcement from the Bank of England although as I looked at the media I also noted that very few had bothered to read the headline and I have emphasised the relevant part.

HM Treasury and the Bank of England (the Bank) have agreed to extend temporarily the use of the government’s long-established Ways and Means (W&M) facility.

Here are a couple of responses who seem to have avoided reading the release.

‘Helicopter money” begins in the UK, the Bank of England will directly pay for government spending WITHOUT government having to issue debt. This will happen everywhere and should happen here in Ireland. Only way to avoid austerity stupidness later. ( David McWilliams)

 

Biggest experiment in monetary history: Bank of England to directly finance extra government spending ( @Schuldensuehner)

No-one seems to have told Holger about Zimbabwe or more curiously Weimar in his home country but he might have held his horses back if he had bothered to read the  actual release rather than the Financial Times click bait twitter headline.

Bank of England to directly finance extra government spending

Ways and Means

This is described below.

The W&M facility is the government’s pre-existing overdraft at the Bank.

This is a little awkward for the takes above and has another irony in that we see some claiming you cannot treat government borrowing like an overdraft when in fact this bit is one! In terms of amounts it existed yesterday.

Ordinarily a standing balance of around £0.4bn is maintained to support Exchequer cash
management…. As of 8 April 2020, drawings under the W&M facility remain at £0.4bn. The outstanding balance will, as normal, be published weekly on the Bank’s website.

Actually it is some £370 million but these days £30 million seems so small doesn’t it?

In terms of what will happen now well it will get larger.

As a temporary measure, this will provide a
short-term source of additional liquidity to the government if needed to smooth its cashflows and support the
orderly functioning of markets, through the period of disruption from Covid-19.

I have pointed out before that this orderly functioning of markets issue is something of a fantasy, after all the Bank of England is like a London Whale in the UK Gilt market. But as long as this is a short-term measure then it is sensible.

Let me explain with reference to the last time this facility was used in size.

The previous high for use of the W&M account was £19.9bn in 2008.

This was from Christmas Eve 2008 until the 25th of February 2009 when it fell to £4.14 billion and then to the overdraft level of £370 million on the 8th of April. As to the details well it was hard not to have a wry smile when I noted it was Robert Pearson who asked for them via a Freedom of Information request so let me show the relevant part of the reply.

The Government repaid £7.0 billion of the Ways and Means Advance on 17 April 2008. It subsequently decided to increase the balance of the Ways and Means Advance temporarily, by £3.8 billion, in order to smooth the impact of the refinancing of part of the Bank of England’s loan to the Financial Services Compensation
Scheme. The Government will repay the remaining £3.8 billion in 2009-10.

We are told that this will happen again this time around.

. Any drawings will be repaid as soon
as possible before the end of the year.

Quantitative Easing

Rather curiously the financial section of UK social media seem much less interested in the £200 billion of UK QE that has been announced. The UK issued  a  £3.25 billion of Gilt earlier this week and this led to more than a few reports that we were finding it easy to issue our debt. Whilst this is true it is surely relevant that the Bank of England bought some £4,5 billion of Gilts on the same day. That will happen again today meaning that a total of £13.5 billion will be bought this week.

If we stay with the QE purchases then we have bought out as far as 2071 ( QE for our grandchildren) and paid as much as £221.8 for something which will be redeemed at £100. That is a sign of how much Gilt yields have fallen because believe it or not the 2068 Gilt offers a coupon of 3.5% whereas we would now offer a coupon of 0.75%. Actually you might make a case for 0.5% but I think you get the idea.

UK Net Debt Issuance

In spite of a large amount of Gilt issuance this week by the UK government which is £12.21 billion by my maths if we allow for the Bank of England purchases we remain net buyers of the order of £1.3 billion. This seems likely to continue as this excerpt from a twitter conversation with the Gilt trade Moyeen Islam shows.

At 13.5bn a week, APF will outstrip supply and see 25bn returned in cash terms to the mkt over April.

Mortgages

There is a curious state of play right now. In the opinion of the Bank of England a major factor in its impact on the economy is via the housing market and house prices. These days that is more via QE and the Term Funding Scheme than official interest-rates because so many mortgages now have a fixed interest-rate.

LONDON (Reuters) – Britain’s housing market has been thrown into the deep freeze by measures to slow the spread of the coronavirus, and is unlikely to have recovered a year from now, according to the Royal Institution of Chartered Surveyors.

Actually when making the point I got this reply from Andy Barnes.

Indeed! If you’re after a 10 year fix as a FTB with less than 40% deposit (quite likely), then you have a grand total of just 2 mortgage products (HSBC) to choose from on the market. Min 20% deposit, relatively extortionate rates of 3.19% and 3.44%.

 

Comment

A calm analysis of the Bank of England action shows that today’s move is not as so many have broadcast. This does not mean that there are no challenges. For example we have seen the word “temporary” used and regularly abused in the credit crunch crisis. So much so that it is defined as “any time between now and the end of the universe” in my financial lexicon for these times. However the UK government is plainly spending at a very fast rate and it will take a while to issue the Gilts to pay for it. Otherwise the market may get indigestion in spite of all the Bank of England purchases. So for once there is some truth in this being to help create an orderly market.

The bigger danger to my mind is the amount of QE  that is being undertaken as we head for £645 billion. There are loads of takes that this is fine and for now it is. But should we ever recover we will have an expanded money supply with velocity picking up and there will be inflation dangers. Not now because even with money there is not a lot to spend it on! But it may happen sooner than we might think.

On the subject of inflation the UK has a new measure and I have formally replied to it.

Movements in the all-HDP items index show a stable increase over time, with an increase of 2.6% since week 1.

Anyway here are part of my thoughts and the full reply is on the Statsusernet website.

I can give an example of an issue here which is valid as this is essentially an anecdote index. In terms of Rice there was a sustained period when the shelves were empty of it and best of luck with getting an online shopping booking! Anyway when I could buy some I had to buy a different type which was some 73% more expensive. Also as I liked the Rice I previously bought I may have been substituting an inferior product making the change larger. So there was quite a shift which I am sure many experienced……….

Accordingly there is much to consider in terms of both the new measure and keeping the normal measures of inflation relevant. In that spirit may I suggest that the indicator saying Antibacterial Cleansing Wipes fell in price in the first week of the measure gets looked at again as the seems to quote the film Star Wars to be from a place “far,far,away…”

Let me finish with some good news which is that UK banks seem to have their US Dollar liabilities under at least some control, which is not true everywhere.

BoE: Allots GBP5 Mln At Contingent Term Repo Facility 3-Month Operation, Zero At 1-Month Operation

 

 

 

 

 

 

 

 

 

Helicopter Money is not the answer to our economic problems

One of the features of the credit crunch era is the way that policies which seem extraordinary have a way of coming to fruition. We have seen many examples of this in the world of monetary policy. The two headliners would be negative interest-rates and Quantitative Easing or QE bond buying. The latter had previously only been a feature of the response to the “lost decade” in Japan but is now widespread. If it had worked we would not be discussing the “lost decades” but that seems to bother only me. Also these moves are invariably badged as temporary but so far none of them have gone away. Indeed in my home country the Bank of England is currently making QE look about as permanent as it can be.

As set out in the minutes of the MPC meeting ending on 31 July 2019, the MPC has agreed to make £15.2bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 September 2019 of a gilt owned by the Asset Purchase Facility (APF).

It will reinvest another £1.27 billion today but it is tomorrow that will be the real example of “To Infinity! And Beyond!” when it buys long and ultra-long dated Gilts.

These themes were on my mind when I noted this in the Daily Telegraph.

A radical world of “helicopter money” – where central banks fund government spending – is “inevitable” as policymakers run out of ammunition ahead of the next recession, top economists have warned.

Central banks are likely to “explore more unconventional policies” in the next downturn and blur the lines between fiscal and monetary policy with radical new tools, such as monetary financing, Deutsche Bank argued.

Let us just mark the issue that Deutsche Bank are top economists and move on. As to the details here is the original suggestion from Milton Friedman.

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.

Those of you who follow me on social media will know that I note the daily RAF Chinook flights over Battersea as they could carry a lot of notes. Perhaps they could name them “Carney’s Cash” and “Broadbent’s Bonanza” for the occasion.

The one time this sort of thing was tried it was in fact via a tax rebate in Japan and amounted to £142 if my memory serves me correctly. However being Japanese they mostly saved it so it was not repeated. So any UK repetition of this would be different as if you look at out habits we would be likely to spend it which starts well but then of course would be likely to make our current account deficit worse. Here from this morning is a reminder of it.

The UK current account deficit narrowed by £7.9 billion to £25.2 billion in Quarter 2 (Apr to June) 2019, or 4.6% of gross domestic product (GDP).

Whilst it is welcome we did better the overall picture is this.

The UK has run a current account deficit in each quarter since Quarter 3 (July to Sept) 1998 or, when considering annual totals, 1983.

So there is an issue although I have many doubts about the accuracy of the numbers especially when we get to investment flows. Let me give an example from the savings numbers released this morning.

The most notable recent revision was in 2017, when the previously published lowest annual saving ratio on record was revised upwards from 3.9% to 5.3%, meaning that the lowest annual saving ratio on record is now observed in 1971 where it stood at 4.8%.

If you remember the media furore at the time that is quite a big deal. Also it gets worse.

The annual households’ saving ratio in 2018 was revised upwards 1.9 percentage points to 6.1%.

Let’s us move on by noting how an emergency measure is being presented as almost normal which of course is more than familiar. We will know when they intend to begin it because we will see a phase of official denials as they get their PR spinning in first.

GDP Growth

This morning’s UK release was rather inconvenient for the monetary expansion apologists as we saw this.

UK gross domestic product (GDP) contracted by an unrevised 0.2% in Quarter 2 (Apr to June) 2019, having grown by an upwardly revised 0.6% in the first quarter of the year.

This meant that the annual rate of growth rose to 1.3% which is better than the Euro area’s 1.2%. I point this out because Michael Saunders of the Bank of England was telling us on Friday that we were in a weaker position. Also there was this.

Annual GDP growth in 2017 is now estimated at 1.9%, revised up from 1.8%,

So we move on knowing that the past was better than we thought. or if you prefer that economic growth has slowed by less than we thought.

Money Supply

There has been an improvement in recent months and here is this morning’s release from the Bank of England.

Broad money (M4ex) is a measure of the total amount of money held by households, non-financial businesses (PNFCs) and NIOFCs. In August, money holdings rose by £10.4 billion, with positive contributions from all sectors.

 

The total amount of money held by households rose by £4.6 billion in August. This was primarily due to a large increase in non-interest bearing deposits. The total amount of money held by NIOFCs rose by £3.3 billion, while the amount held by PNFCs rose by £2.5 billion.

Sorry for their love of acronyms and NIOFCs are non intermediating financial companies.

This means that the annual rate of growth for broad money is 3.3% as opposed to the 1.8% registered in May. The main changes have come in July and now August.

If we switch to M4 lending which is sometimes a useful guide then things have improved considerably as the rate of annual growth has pushed up to 5.5%. As mortgage lending remained pretty similar it has been driven by this.

Borrowing by financial companies that do not act as intermediaries, such as pension funds or insurance companies (NIOFCs), rose to £16.6 billion in August, the largest amount since monthly figures were first collected in 2009. Fund managers were the largest contributor to this strength.

Thus as so often with this sort of data ( bank lending) we are left wondering what the economic impact will be?

Consumer Credit

This continues on its merry way.

The extra amount borrowed by consumers in order to buy goods and services fell to £0.9 billion in August, slightly below the £1.0 billion average since July 2018.

The Bank of England are keen to point out this.

The annual growth rate of consumer credit continued to slow in August, falling to 5.4%. This remains considerably lower than its peak of 10.9% in November 2016, and is the lowest level since February 2014.

There are several elements of context to this. Firstly the rate of growth has been so fast it has raised the total to £218.6 billion so percentages would naturally fall. Also the weakening of the car market has contributed. Next the numbers are still much higher than anything else in the economy.

Small Business Loans

Remember when the monetary easing was supposedly for smaller businesses? Well there is a reason why that went quiet.

In contrast, the growth rate of borrowing by SMEs weakened slightly to 0.7%.

Comment

If we consider the overall situation we find several problems with helicopter money. The first is that it is supposed to be an emergency response when we keep being told we are not in an emergency but rather a recovery. It is a bit like putting an electric shock on a heart which is still beating. The next is that it would be an extraordinary move and yet again a big change would be made by unelected technocrats. This reminds me that some years ago I made the case for Bank of England policymakers to be elected. Finally it is just another way of the establishment making things easier for itself at the expense of the wider population.

This is because the wider population would be at risk of inflation and maybe much more inflation. This need not be consumer inflation as so far in the credit crunch era we have seen moves in asset prices such as bonds, equities and house prices. The latter of course allows the establishment to claim people are better off when first-time buyers are clearly worse off. Putting it another way this is why they are so resistant to putting house prices in the inflation indices and the new push to use fantasy rents suggests they fear helicopter money and negative interest-rates are on the horizon.

Podcast

 

 

 

 

 

 

Why if stimulus is the medicine for Japan’s economy does it always need more?

One of the earliest subjects of this blog was Japan and its economic travails. Later I moved onto the subject of Abenomics where the government of Shinzo Abe planned to end deflation via a fiscal stimulus but mainly through monetary stimulus on a grand scale. I was always dubious about whether that would work especially on the subject of the third arrow which was supposed to be economic reform as Shinzo Abe is a representative of old Japan and his previous government had been guilty of what is called “pork barrel” politics. Such a view made me stand out as elsewhere they was a lot of cheerleading and claims of likely and in some cases near certain success,If we go back to October 2013 then Paul Krugman told us this.

And it has been an unambiguous good thing for the Japanese economy………..The answer is, Abenomics, which has successfully, at least for now, convinced investors that the Bank of Japan has changed its spots and will keep the pedal to the metal for a long time even after moderate inflation sets in.

My critique of such arguments was based on two main themes. The first was that Japanese society had adjusted over the “lost decade(s)” period to low inflation and indeed low wage growth and it was going to be much more difficult than argued to change that. Also that I was unconvinced that more stimulus would be a magic wand as Japan had seen various efforts on this front each of which had fizzled out in disappointment. In fact even the current claimed saviour helicopter money had been tried and then abandoned in failure. Or to put it another way we were on around QE 13 even then.

Thus I predicted that we would see this from Andrea True Connection being played on the loudspeakers at the Bank of Japan.

More, more, more
How do you like it?
How do you like it?
How do you like it?

We have seen two main phases of this. The first was to expand the Quantitative Easing effort by expanding both the amount and type of the purchases. This meant that the Bank of Japan bought equities via Exchange Traded Funds and commercial property via Real Estate Investment Trusts or what are called J-REITS. Back on the 25 th of April I covered this issue as what is now known as The Tokyo Whale is eating its way through the ETF market. It does not make it easy to track down the purchases in its accounts but it look as though another 800 billion Yen have been purchased since then. Next was the move into negative interest-rates back in January as an official interest-rate of -0.1% was declared.

In case you are wondering what the next section means for you well central bankers are dedicated followers of fashion and what happens in Japan is seen later elsewhere. Time for The Soca Boys.

Follow the leader, leader, leader
Follow the leader
Follow the leader, leader, leader
Follow the leader
Follow Me!

Japan gears up for more Abenomics

Over the weekend the position of Shinzo Abe and his government was strengthened by his election victory so the ground was tilled for even more. Speculation on this front was boosted by a visitor to the Japanese government and central bank. From the Nikkei Asian Review.

Former Federal Reserve Chairman Ben Bernanke on Tuesday urged Japan’s Prime Minister Shinzo Abe to keep pushing to decisively defeat deflation, according to an adviser to Mr. Abe.

A lot of eyes will have alighted on this bit in particular.

The adviser left it vague whether Messrs. Abe and Bernanke discussed a radical step involving a central bank directly financing government spending—a measure known as “helicopter money” that Mr. Bernanke has advocated.

So we are back on the more,more,more road except we did get an excerpt worthy of the science fiction fantasy program The Outer Limits.

At a face-to-face meeting, Mr. Bernanke said Mr. Abe’s growth measures have worked well so far,

Eh! Why is he there then? Anyway we were also told this.

that Abenomics “will work even better if we add fiscal spending” to it, according to Mr. Hamada. Mr. Abe is widely expected to compile a large-scale fiscal package in the autumn that his aides and officials say will likely top Y10 trillion.

Reuters have weighed in with this.

Japanese Economy Minister Nobuteru Ishihara said on Tuesday the government may issue construction bonds to fund a planned stimulus package to revive a flagging economy.

Ah so “worked well so far” is now a “flagging economy” is it?

Japanese Government Bonds (JGBs)

I would like readers to remember that one of the ways that Abenomics was supposed to work was via holders of JGBs losing money. Even back then JGB yields were such that any achievement of the 2% inflation target would leave then losing money in real terms. Now the Nikkei Asian Review tells us this.

Investors are buying medium-term JGBs in expectation of further easing from the BOJ at its policy board meeting at the end of July in response to weaker inflation data and a stronger yen.

The consequence of them front-running the Bank of Japan in terms of market prices are seen below.

In particular, medium-term instruments like two-year and five-year bonds are attracting significant numbers of investors. The two-year JGB yield fell to a record low of minus 0.365% on July 8, while the five-year yield sank to minus 0.375% on Friday, also an all-time low.

What has taken place is that bondholders have made large nominal gains which have not been eroded by inflation at all as the official measure of consumer inflation in Japan is around 0%. Now whilst I do not expect Paul Krugman to have forecast the fall in the oil price in this area we see exactly the reverse of his road to claimed success.

Financial Markets

They think that a change is in the offing. For example the Japanese equity market has surged this week pushing above 16,000 on the Nikkei 225. But the main change has been seen in the value of the Yen which has weakened considerably and as I type this is at 103.75 versus the US Dollar. So something is expected and Rabobank seem to have been the first to push their nose above the parapet in this subject.

The celebration is because in the same way the BoJ repeatedly said it would not increase stimulus, then did so, and repeatedly said it would not cut interest rates to negative, then did so, the market now suspects we are on the cusp of ‘helicopter money’ in the near future: if so, that’s obviously negative for JPY and hence positive for equities.

Comment

The central point her is that what we are getting is more of the same and the need for it reminds us that what we have had so far has not worked, in spite of the claims to the contrary. We have another signal of this in the way that QE became QQE (Quantiative and Qualitative Easing ) in Japan in the same way that the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield!

If we return to my medical analogy in the title above then the treatment can only be a palliative and not a cure. We are reminded of the concept of an economic junkie culture.

Ireland GDP

There has been an extraordinary development this morning from the Central Statistics Office. It has announced that GDP (Gross Domestic Product) rose by 21% in the first quarter of 2015 and yes you do read that enormous revision correctly! I have looked at the detail and so far I have spotted that exports have been revised higher by 50%.

Just for clarity this is not a joke, at least not by me. I have written often on the problems created for economic measurement in Ireland by having so many non domiciled companies.

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

Me on Tip TV

 

Helicopter Money mostly comes from the rarified air in Ivory Towers

Today I wish to examine the new fashion or as some might put it fetish in economics. This is the concept of helicopter money which is the equivalent of the new “bright young thing” in economic and in particular monetery theory. Here of course we immediately have a catch which is that the certainty with which it is pursued by its proponents is rather familiar indeed as are they. This is because a rather similar group of people made rather similar grand promises about other forms of extraordinary monetary policy. But now that the extraordinary has morphed into the ordinary we see that the promises were between mirages and charades. Even Bank of Englnd Governor Mark Carney told us as much last month. The tacit admittal that what was badged as progress was in fact the can – kicking into the future I have described on here for several years did not get the publicity it deserved. Governor Carney is now looking for the cavalry hoping people willforget that he was not only supposed to be it he encouraged that notion.

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? This remains a persistent critique of monetary “innovations ” as I observed yesterday when looking at Abenomics in Japan which so many told us was a leap forwards but in reality is stuck in the mud. 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. You do not need to take my word for it as President Draghi of the ECB asks for the same reforms each meeting. In fact it is the most certain part of his statement.

What is Helicopter Money?

The simple concept of money being dropped from helicopters works quite well for explaining this idea. In the UK with the large number of Chinooks in service with the Royal Air Force even the practicalities for once would work out. When they fly over South London I have to confess I do sometimes wonder if they are flying planning routes. Milton Freidman described the idea thus.

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.

In essence the recipients would have to do very little to collect it and in a literal sense would only have to go outside to be showered in cash. This “free” present would then be spent quickly and the economy would be boosted by the additional expenditure, or so the theory goes. You may note that chucking the money out of the windows of an Ivory Tower would have a broadly similar effect except perhaps that with the height of modern Ivory Towers not only is the air rarified inflicting the symptoms of oxygen deficit on the inhabitants but the money could float quite a distance from its targets in the winds and jet streams.

Monetarism

Putting this another way we have just raised the money supply which we would expect to result in a combination of higher output and inflation. A couple of decades ago this was called monetarism which was how the thoughts of Milton Friedman were categorised then In an irony we were going in the reverse direction trying to reduce inflation via a form of anti-QE called Overfunding in the UK and higher interest-rates. The problem then was that we found that the mixture between output and inflation was not always favourable which is a flashing amber light for the proponents of helicopter money.

However some care is needed here as some proponents want more inflation. Apparently the air is so rarified in some Ivory Towers that the oxygen debt so created makes the inhabitants think that more inflation leads to more economic output. They close their minds to the two realities of this. The first is that they will have to claim that some of the inflation such as higher house prices are in fact an economic benefit  rather than the reverse, this is one of the reasons why they cheerlead for “improved” as in lower inflation measures. It also ignores the fact that the lower level real wages created by the higher inflation will depress economic output in the way it did in the UK in 2010/11.

Permanent and Temporary

The literature says that the money created has to be permanent. this does create a problem as in a world where temporary can mean any time period up to infinity and sometimes beyond what does permanent mean? Let us hope that our recipients spend the money quickly whilst our theorists debate!

Is this QE or Quantitative Easing?

Many thought of QE as “printing money” which rather awkwardly it was and was not. A bit like Heisenberg’s Uncertainty Principle economics found itself in a very uncertain world. For example the QE of the Bank of England was mostly deposited back at the Bank of England as the recipients decided what to do next. If we look for evidence of the impact we see perhaps higher house prices lower Gilt yields and higher equity prices but there are issues even with these. What I mean by this is that if QE was working as well as the bank of England hoped ( i.e pumping up house prices) we would not have had the Funding for Lending Scheme!

Where QE has approached helicopter money is the way in which it has extended out. What I mean by this was much of it was badged as short-tern but latterly under the label of “Operation Twist” much longer-dated bonds have been bought with the UK going out to 2065 last time I checked. Crucially there is also no plan at all to redeem or reverse the operation. My suggestion in City-AM from a couple of years ago my not be far off unique. To put it another way if the Bank of England had any real plans to reverse QE it would not have given the job to Dame Shafik. I also note that Mario Draghi is issuing plans beyond his own term at the ECB.

Where QE is not so far been printing money is that central banks have no overtly financed government spending. The Bank of England has got close but has kept to its rule of not buying a bond for at least 3 weeks after it has been issued. Of course implicitly they are helping both by providing a buyer of last resort and reducing bond yields but not so far explicitly. I am talking of the major central banks here as for example if I recall correctly the Bank of Ghana did. Oh and for some buyer of last resort is pretty much buyer of first resort isn’t it?

Comment

There are various issues here which pose their own problem.The most obvious to me is that why do we need this in what we are told is a recovery? The “More, More ,More” theme of both Andrea True Connection and Agent Smith which I started over 5 year ago gets ever more backing. Also if the previous policies were such a success why do we need it at all?

In reality we find that the results are likely to be patchy at best as we wonder what the mixture will be between output and inflation. Should all the QE have future inflationary consequences then we may find this is a problem squared. Also we have travelled the road from monetary to fiscal policy where it would be simplest for the central bank to create the money and give it to people. As it could not do so without political approval we would see the last remaining brick or two in the façade of “independence” come crashing down too.

So it would be a fiscal boost by another name. Can they work? Of course they can help as we saw in Spain on Monday. Are they the magic key to the door? No or yesterdays post would be describing what an economic success Japan is.

For me the use of helicopter money is an a real deflationary and depressionary spiral. So why is it being proposed when we apparently and officially have both economic growth and house prices have been soaring? Also the one place which might be a test case which is Greece seems the least likely to get it.

 

 

The economic plan of Jean-Claude Juncker echoes Alice In Wonderland

The question posed in the title of today’s post is something that has applied to the Euro area over the past couple of years or so. A new entry in this category is being provided today by European Commission President Jean-Claude Juncker. I guess he will be grateful for anything which takes the media attention away from his involvement in the apparent tax avoidance and perhaps evasion scandals in Luxembourg whilst he was Prime Minister. Also I recall him conducting a joint press conference around 18 months ago with the then President Barosso where both told us that their priorities were economic “growth,growth,growth”. They then seemed to forget that as well as talk actions were required and of course since then the Euro area has seen very little growth.

The EFSI

One familiar theme in the Euro area is inflation of the number of acronyms and we now have yet another. The EFSI or the Economic Fund for Strategic Investment sounds rather grand does it not? They invariably do on paper it is the reality which disappoints as Cyndi Lauper put it “time after time”. So let us examine the details which have been officially announced this morning. There was as ever little shortage of hype and bombast.

today we are adding the third point of a virtuous triangle:………We need to send a message to the people of Europe and to the rest of the world: Europe is back in business. This is not the moment to look back. Investment is about the future……a grand bargain to put Europe back to work.

I have a vision of school children in Thessaloniki walking into a brand new classroom, decked out with computers.

With all that hot air he could heat the parliament building on his own! Also if we have a third point of a virtuous triangle we also need points one and two. Actually the hype is rather contradicted by this bit.

investment in Europe is not rebounding.

A problem

President Juncker thinks that national budgets are already overstretched.

Others say we need more debt. We do not. National budgets are already stretched.

So what can he do then. Well there always is Alice In Wonderland to draw inspiration from.

Why, sometimes I’ve believed as many as six impossible things before breakfast.

If you don’t know where you are going, any road will take you there.

One day Alice came to a fork in the road and saw a Cheshire cat in a tree. ‘Which road do I take?’ she asked. ‘Where do you want to go?’ was his response. ‘I don’t know,’ Alice answered. ‘Then,’ said the cat, ‘it doesn’t matter.

So emboldened by the writing skill of Lewis Carroll lets examine the details and it starts in an almost sane fashion.

We are creating a new European Fund for Strategic Investments, guaranteed with public money from the EU budget and the European Investment Bank (EIB). The Fund will be able to mobilise €315 billion over the next three years.

But how can this not affect the national budgets are we have been promised? Now we need to immerse ourselves in a through the looking-glass type of world.

The Commission has put up €8 billion from the EU budget. This backs up a €16 billion guarantee given to the Fund. Topped up by another €5 billion from the EIB. That makes €21 billion.With a €21 billion reserve, the EIB can give out loans of €63 billion. That’s €63 billion of fresh financing we’ve just injected into the economy. But the EIB will not be acting alone. The EIB will be financing the riskier parts of projects worth 315 billion, meaning private investors will be pitching in the remaining €252 billion.

You may note that there is a swirl of numbers and magically very little becomes a large sum. If only we had Alice to explain this! The EU Commission is only putting up £8 billion of actual cash at which point we have a leverage rate of 39. That is a little different to the implied leverage ratio of 3 is it not? If we include the capital provided by the European Investment Bank or EIB we reduce the leverage ratio to 25. If we also chuck in the guarantees as we mull the difference between a guarantee and capital the leverage ratio falls to what feels like a mere 15! What could go wrong?

Jean-Claude is keen to emphasise the latter ratio.

Every euro from these programmes paid into the Fund creates €15 euros for those very same research and infrastructure projects.

Also let us note the 252 billion Euros of private-capital which has been magicked into existence. We know that it is not there right now because President Juncker has told us so. To get it to turn up he will have to sweeten the terms as in if we shorten his name to Junk, that is the bit the taxpayers will be backing. Taxpayers should rightly fear that their losses could easily exceed the supposed capital in yet another “surprise”. Seeing as the expenditure will be off-balance sheet aka not counted there will be some fun and games to say the least in such a scenario. Imagine struggling Greece and Italy having to pay up their share of the losses. This bit may be correct though except not in the way intended.

4. No way back

Who will be doing the investing?

Never fear there is a team ready and waiting.

The Fund will have a dedicated Investment Committee made up of experts that will have to validate every project from a commercial and societal perspective and based on what value-added they can have to the EU as a whole.

Would somebody please explain to me a) How this works? and b) What have these experts been doing up to now? It reads like a bureaucratic nightmare out of 1984 or Brave New World. Also the bit below is surely a contradiction in terms….

mature, growth-generating projects of European significance.

After all if such things were readily in supply matters would be not where they are would they? Quite how all that fits with the section below escapes me.

We need something agile.

The EIB

This institution receives almost unmitigated praise which would seriously trouble me if it did not do so already.

Werner, the triple-A of your institution is a European treasure that we will now put to even better use for Europe. We couldn’t have done this without you.

I am not sure what Jean-Claude Juncker thinks he has actually done yet! I guess like many politicians he equates talking with doing. Anyway dear readers the vast majority of you are backers of the EIB which increasingly does not just invest in Europe as you might think. Its scope has -somewhat bizarrely- spread all over the world. You might think that the current state of the Euro area economy would require its full attention but apparently not.

Here are some details for you to peruse.

At 1 July 2013, the Bank’s subscribed capital amounted to more than EUR 243bn.

Quite a lot is it not? The major backers are the UK,Germany,France and Italy who all back 16.1% of it. In Italy’s current state I wonder how that works exactly? But it gets worse as the capital has been increased in recent times so how did Greece (1.2%) and Cyprus (0.1%) contribute? I do hope they were not lent money so they could provide capital…….After all that would be a prima facie ponzi scheme would it not?

Some of you may be wondering where this shows up in the UK ONS Public Finances report? Well it does not as it only appears when it is unavoidable,excuse me, losses are declared. At what point I wonder would they ever declare a loss? Much easier to say it is about to turn a corner.

Remember the EFSF?

There are so may echoes here of the European Financial Stability Fund or EFSF. Remember the days when individuals like Christine Lagarde told us that the EFSF was a “shock and awe” measure? Shock at the stupidity of it yes,and look at what it did to poor Greece.

Why would you wish to repeat a disaster like that?

Comment

This has all the hallmarks of a pyramid style ponzi scheme. I thought that they were supposed to be illegal.

Also as super national organisations deploy the backing of European taxpayers including the UK for their schemes and fantasies who of our elected politicians is on the case? Has democracy died?

Finally will private-sector investors get something of a free lunch on the back of European taxpayers and if so who selects the investors involved?

Why is printing money always equated with more prosperity?

The credit crunch has seen an extraordinary relaxation of past limits for monetary policy as central banks have marched forwards into the breach. However for some and this includes the Senior Fellow at the Institute for New Economic Thinking Adair Turner they have not done enough. Baron Turner is regularly featured in the media with such views and he has written a piece for the Financial Times which in terms of monetary policy has him singing along to Luther Vandross.

Never too much, never too much, never too much
I just don’t wanna stop.

This is far from the first piece of writing by Lord Turner suggesting such matters as we wonder if he gives it another go every six months or so. Of course if he really had the answer to economic policy one might wonder why he did not deploy it when he was the Chairman of the UK Financial Services Authority (FSA) from September 2008 to 2013. After all he cannot claim to have been dealing with the LIBOR scandal can he? His reputation for prescience must have taken a knock from him having been one of the major proponents of the UK joining the Euro being a joint author of the paper below.

Why Britain Should Join the Euro

The very prospect sends a chill down my spine and I am not indulging in a Eurosceptic theme here as anybody can see that the UK’s housing-sector would have boomed and then bust just like Spain and Ireland. In fact maybe worse. Also you may have spotted that this would have provided a monetary boost to the economy (before the inevitable bust) which seems to always be on Baron Turner’s playlist. Although you see in his world back then we had apparently ended boom and bust. How did that end up?

What is he suggesting this time?

There is no great surprise in that for monetary policy for Baron Turner we always need to sing along with this.

More, more, more
How do you like it?
How do you like it?

Get the cameras rollin’, get the action goin’

So what is his policy prescription?

the best way to do that, particularly in Japan and the eurozone, would be to deploy a variant of Friedman’s idea of dropping money from a helicopter. Government deficits should temporarily increase, and they should be financed with new money created by the central bank and added permanently to the money supply.

 

Actually Japan did give such a policy a go some time back when it gave individuals a tax rebate which at the time was equivalent to £142 if my memory serves me right. Baron Turner does not mention this however. Perhaps he is unaware of it or perhaps what happened next -they saved it- is an inconvenient answer. After all it hints at failure before he starts.

Let us continue with his policy prescription and the emphasis is mine.

Money-financed deficits would increase demand without creating debts that have to be serviced. This would lift either real output or inflation and allow interest rates to return to normal more quickly.

 

It is hard to overstate the intellectual bankruptcy at play here. So the outcome may be good (more output) or bad (more inflation). That narrows it down doesn’t it? Tucked in with this is the hint that perhaps Baron Turner sees inflation as not being all bad as it would help the economy deal with the problem he identifies.

The global economy is suffering the hangover from many decades of excessive private sector credit growth. In 1950 private credit in advanced economies was 50 per cent of gross domestic product; by 2007 it was 170 per cent.

 

As you can see higher inflation would at the aggregate level help with the debt problem he has identified. But if you are polite he glosses over and if you do not wish to be so polite ignores the fact that this would have economic casualties. This is quite common for the UK political and economic establishment which has always tried to cast a fog around the fact that the inflation the Bank of England “looked through” was in fact a major cause of the UK real wage crisis where the exact fall depends on the inflation measure you use but is of the order of 10%. Of course the UK establishment has also mounted quite a campaign against measures of inflation which give higher results such as the Retail Price Index. The minute they started such a campaign I was on my guard for further inflationary policies as it was a move that the apocryphal civil-servant Sir Humphrey Appleby of Yes Minister fame would make.

If we move now to the apparent consequence of higher interest-rates I am afraid that we are at joke levels here. So Baron Turner whose solutions in the credit crunch era (and indeed his Euro advocacy) always involve a loosening of monetary policy is now promising a tightening of it! Oh but it comes via a loosening.

Also if we are on a good path and getting growth why would we want to do this?

True, banks might amplify the stimulus by creating additional private credit, but they can be restrained with higher reserve requirements.

 

After all we would want a boom would we not? Or does Baron Turner think that a statist government deficit driven boom is the only way forwards? That is a bit awkward if one considers the place with big deficits and public-sector debts is the Japan that he criticises.

Currency Wars

It was only yesterday that I analysed this subject and it is relevant when we are considering a subject such as debt monetisation. Whilst Baron Turner skirts the subject this is what he really means. When I looked at Ghana in the summer its central bank had tried this earlier in 2014 and the currency had plummeted. Now we never have simple cause and effect in economics but we have to ask the question which is what happens if Japan tries this and the Yen replaces it current decline (116 to the US Dollar today) with an outright plummet in response to such a move? Let me pick 150 to the US Dollar and just to keep the numbers round 190 versus the Euro.

But the Euro area needs it too and so it responds and the Euro plummets and we are back in the competitive devaluations which so marred the 1920s and we hoped to have the intelligence not to repeat. Another way of putting it is that they would be exporting deflationary pressure.

Comment

This hits straight on two fault-lines in economic theory. The first is whether monetary stimulus creates economic growth or inflation? If the growth case was clear-cut we would not still be debating the matter would we? After all we have had six years of extraordinary stimulus. If we look at my own country we have had this.

1. Base Rates cut to 0.5%

2. Major banks bailed out by the taxpayer to protect the precious banking system

3. Supplementary Liquidity Scheme as an implicit bank subsidy.

4. Some £375 billion of purchases of UK Gilts (government bonds) by the Bank of England.

5. Funding for Lending Scheme by the banks as a way of subsidising our banks via the housing and mortgage markets. The government added to this with Help to Buy.

Unlike some countries we did have a consumer inflation episode which many now want to gloss over. But the major inflation issue has shifted to asset prices or if I am more precise has been allowed to continue in asset prices. We see many stock markets at all-time highs and UK house prices have not fallen as I hoped they are now as an aggregate higher. If we return to the UK establishment they went to a lot of trouble to exclude house prices from the version of our official consumer inflation measure which is supposed to include housing. How did that go?

The National Statistics status of CPIH has been discontinued pending work by ONS to investigate and improve the method for measuring owner occupiers’ housing costs in this index.

 

If you read my past blogs you will see that this was perfectly predictable and of course no-one in authority is to blame.

So the success if we are being generous is patchy and even Baron Turner admits there are plenty of failings.

But there are dangers. Sustained low interest rates create incentives for highly leveraged financial engineering. They make it easier for uncompetitive companies to survive, which could stymie productivity growth. And they work by restarting growth in private credit – which is what led to our current predicament.

 

But never mind put your minds into neutral and turn up Elvis Costello on the radio.

Pump it up until you can feel it.
Pump it up when you don’t really need it.

 

The alternative of a reset to our economic system is always ignored. Indeed even yesterday’s headlines about Mark Carney and “ending Too Big To Fail” apply to something which at best will not be in force until 2019.

 

My campaign on rail fare inflation

This reached the BBC website yesterday which was nice to see.

http://www.bbc.co.uk/news/blogs-magazine-monitor-29934599

 

I was kind of hoping for a mention but at least the RPICPI User Group got one.