In a 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’s a limit to how far down that could go.
Looking at the experience of Japan, Bernanke suggested instead turning towards physical money printing. The money could then be delivered to the masses somehow. Bernanke suggested dropping it from helicopters.
Fourteen years later, we might finally be on the verge of helicopter money. And why not?
After most countries hit a zero-percent interest rate, many central bankers have tried to push interest rates negative.
Two years ago, we saw the first of these negative interest rate government bonds.
Remember, a negative interest rate means investors would lose money, guaranteed, on every “investment.” Today, with the Bank of Japan and European Central Bank leading the way, over $19 trillion in government debt worldwide trades at a negative interest rate. The amount of bonds trading at a negative rate has exploded, and is growing at an unsustainable pace.
That’s a far cry from how the real world works. You need positive interest rates. It’s what induces holders of money to lend out their capital. It keeps a check on borrowers from going with crazy, uneconomical idea.
Forget a home mortgage or a car loan. If interest rates were negative, you’d get paid to borrow. 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’s also why the alternative, helicopter money, is starting to take off.
Bernanke, now a former Fed Chairman, is popular and in demand worldwide on economic issues. Sure, he didn’t see the giant bubble in U.S. real estate forming. And expanded the Fed’s balance sheet from under $1 trillion to over $4 trillion during the subsequent crisis before cashing out to join the jet set circuit. Hey, nobody’s perfect, although you might get that impression the way we treat retired Fed officials.
Last week, Bernanke met with banking officials in Japan. Japan, dealing with that pesky problem of slow growth and sub-zero interest rates, sounds like it’s looking into Bernanke’s helicopter solution.
While the Bank of Japan came out Thursday stating that it’s not looking into the helicopter money route right now, you have to admit, it’s better than negative interest rates. At least physical money can be stuffed under the mattress to earn zero percent instead of lose money. And instead of rewarding borrowers for increasingly uneconomic plans, it can get to consumers first. If that’s the case, they can end up consuming more, theoretically stimulating the economy.
Printing money means no new debt. No new debt means no future debt deflation, always a concern among central bankers. So it seems better than negative rates so far.
It could mean inflation too, at least at first. That’s the beauty of “found money.” If you found $20 on the ground one day, it might mean a nice meal out you wouldn’t have had otherwise. It wouldn’t be something to expect on a regular basis. But under a helicopter money proposal, why not. The problem is where it stops.
Once people start expecting the helicopter drop, however, all bets are off. 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.
Again, it’s better than negative interest rates, further central bank purchases, or otherwise trying to keep capital flowing even when it doesn’t want to at current prices. But it creates bad behavior, encourages reckless spending, and doesn’t make any structural changes needed to keep crises from becoming bigger every time they occur again.
Time will tell if Japan (or some other country) actually goes through the process of printing up physical money and dropping it on its people. If so, it’ll be a monetary attack on their own people. It might not be successful in Japan, given the Japanese people’s cultural propensity to save money.
If it is done, no matter where, it’ll be a sign of increasing desperation among central bankers that all isn’t as rosy at it appears.
It’s amazing all the work that’s needed once you’ve decided to hand over the decision about who sets interest rates to unelected and unaccountable (read: “independent”) central bankers. The prior method, the free market, involved people with actual capital in the game. In other words, no panel of PhD’s, making the decisions about how other people should be able to lend or borrow. Archaic? Yes. But when looking at today’s policy choices and decisions, it seems a lot simpler, and a lot more effective.
In a world of helicopter money, your best bet in what has been historically real money: gold.
While governments own most of the great hoards of the stuff, they largely treat it with disdain, as opposed to currency pushed onto the masses. As long as gold is out of favor with major central banks, it’s a good value against their increasingly aggressive experiments in monetary policy.
is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and is managing editor of Financial Intelligence Report. To read more of his work, GO HERE NOW.
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