In a World of “Helicopter” Money, Gold Wins
In a Y 2002 speech deriding deflation, Ben Bernanke once poised the idea that a central bank could do just about anything to generate inflation. While the typical central bank tool is with lower interest rates, there iss a limit to how far down that could go.
Looking at the experience of Japan, Dr. Bernanke suggested instead turning towards printing money. The money could then be delivered to the masses somehow.
Remember Dr. Bernanke suggested dropping it from helicopters.
Now 14 years later, we might finally be on the verge of helicopter money.
The Big Q: Why not?
The Big A: After most countries hit a Zero-percent interest rate, many central bankers have tried to push interest rates to Below Zero, aka negative.
And 2 years ago, we saw the 1st of these negative interest rate government bonds. A negative interest rate means investors lose money, guaranteed, on every investment.
Today, with the Bank of Japan (BOJ) and European Central Bank (ECB) leading the way, over $19-T in government debt worldwide trades at a negative interest rate. The amount of bonds trading at a negative rate is growing at an unsustainable pace.
For the world to work we need positive interest rates.
That is what induces holders of money to lend their capital. It keeps a check on borrowers from going nuts, uneconomical ideas.
But consumers can forget a home mortgage or a car loan; if interest rates were negative, they would get paid to borrow.
In an article I read today, financial adviser Andrew Packer wrote: “Let’s go crazy and say you could borrow $50 billion at a negative rate. With that amount of capital, one where you’re constantly getting paid, there’s no limit. How about a project to drain the Mediterranean and create more farmland? If you’re getting paid to borrow, everything is feasible, irrespective of whether or not it actually makes sense.
That’s why negative interest rates are a double-edged sword. It’s also an indication that after over 30 years, the rally in government bonds should be over. Yields are just too low, especially when central bankers are admittedly trying to create inflation.
It is also why the alternative, helicopter money, is starting to take off.”
Now, BB, the former US Fed Chairman, is popular and in demand worldwide on economic issues.
He say’s he did not see the giant bubble in US real estate forming, he expanded the Fed’s balance sheet from under a T to over $4-T during the subsequent crisis before cashing out to join the high paid lecture circuit.
Last week, Dr. Bernanke met with banking officials in Japan. Japan, dealing with that big problem of slow growth and Below-Zero interest rates, Japan is consulting to Dr, Bernanke for the “helicopter” solution, we know it is going on because the BOJ boss is publicly denying it
Here is what the Bank of Japan said in capsule Thursday: “… not looking into the helicopter money route right now, but we have to admit, it is better than negative interest rates.”
At least physical money can be stuffed under the mattress to earn 0% instead of lose money. And instead of rewarding borrowers for increasingly uneconomic plans, it can get to consumers 1st. If that happens they can end up consuming more, theoretically stimulating the economy.
Printing money means no new debt, no new debt means no future debt deflation, that is always a concern among central bankers. So it seems better than negative rates so far.
It could mean inflation in the beginning. The problem with helicopter money is when it stops floating down to the consumers.
Once people start expecting the helicopter crash all bets are off.
My favorite example in history is this one, like the Roman Empire’s decision to provide bread and circuses to the masses, helicopter money creates a terrible incentive to spend in expectation of a further handout, next a crash of government, values, and society.
But, some see this as better than negative interest rates, further central bank purchases, or trying to keep capital flowing even when it does not want to flow at current prices.
It creates bad behavior, encourages reckless spending, and does not make any structural changes needed to keep crises from becoming bigger every time they happen, again and again.
Time will tell if Japan does go through the process of printing lots of physical (paper) money and dropping it on its people. It may back fires given Japanese cultural propensity to saving money.
If it is done, no matter where, it will be a sign of desperation among central bankers ad that they are out of structural tools.
In the free market people with actual capital play in the game.
No panel of unelected academics, should be allowed to make the decisions about how The People should be able to lend or borrow.
In a world of helicopter money the best asset is what has been historically real money, Gold.
While governments largely treat Gold with disdain, as opposed to fiat money pushed onto the consumers.
“As long as Gold is out of favor with major central banks, it is a good value against their increasingly aggressive experiments in monetary policy,”–Andrew Packer.
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Have a terrific weekend