There is a growing consensus that central banks are “running out of ammo.”
They certainly seem to have used all of their monetary tools in an effort to revive economic growth and avert deflation. Yet the results have been disappointing. Indeed, the ECB felt compelled to double down in March by pushing lending rates further into negative territory and expanding its QE program to include purchasing corporate bonds, starting in June. The latest industrial production data for Germany, France, and Italy remain weak despite the ECB’s ultra-easy policy.
The BOJ shocked and awed markets with its negative interest-rate policy (NIRP) at the end of January. The 3/14-15 minutes of the BOJ’s policy committee
indicated that several members aren’t happy with NIRP. Meanwhile, Japan’s economy remains mired in economic stagnation and borderline deflation. At the end of last year, after raising the federal funds rate by 25bps, Fed officials expected to be hiking this rate four times this year. They haven’t done so yet and now are chattering about two hikes over the rest of this year instead.
While the central banks have used lots of ammo and bazookas, they still haven’t tried dropping money from helicopters.
Consider the following:
In The Optimum Quantity of Money (1969), Milton Friedman wrote, “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.”
Friedman focused on the effects of monetary policy on inflation and the costs of holding money, rather than making an actual policy proposal. However, the idea has caught on with a few economists as a serious monetary policy instrument of last resort if all else fails. In their view, helicopter money would best boost aggregate demand in a “liquidity trap” situation when central banks have reached the so-called “zero lower bound” and nothing else has worked.
In his 4/11 blog post,
Ben Bernanke acknowledged that “the benefits of low rates may erode over time, while the costs are likely to increase. Consequently, at some point monetary policy faces diminishing returns.” When that happens, the central banks should get the choppers ready. Bernanke noted that Friedman defined “helicopter money” as money-financed (as opposed to debt-financed) tax cuts.
To us that sounds like QE earmarked for a specific variety of fiscal stimulus, namely tax cuts. There’s no reason why the targeted QE program couldn’t be used to finance infrastructure spending instead of, or in addition to, the tax cuts. If we consolidate the financial statements of the US Treasury and the Fed, it simply means that the government is self-financing either or both varieties of fiscal stimulus by printing so-called “high-powered money” — which shows up on the Fed’s balance sheet as bank reserves on the liabilities side and as the Treasury’s IOUs on the assets side.
In his blog, Bernanke confirmed this point: “[A] ‘helicopter drop’ of money is an expansionary fiscal policy — an increase in public spending or a tax cut — financed by a permanent increase in the money stock. To get away from the fanciful imagery, for the rest of this post I will call such a policy a Money-Financed Fiscal Program, or MFFP.” (The guy always did love acronyms!)
Bernanke concludes his blog post as follows: “Money-financed fiscal programs (MFFPs), known colloquially as helicopter drops, are very unlikely to be needed in the United States in the foreseeable future. They also present a number of practical challenges of implementation, including integrating them into operational monetary frameworks and assuring appropriate governance and coordination between the legislature and the central bank. However, under certain extreme circumstances — sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies — such programs may be the best available alternative. It would be premature to rule them out.”
(3) ECB. Reuters reported
Monday that in a recent interview with Sueddeutsche Zeitung, François Villeroy de Galhau, the head of the French central bank, said that helicopter money was not being discussed at the ECB and was not needed in the Eurozone. “Let’s not waste any time on an issue that isn’t even on the table. We haven’t discussed the issue on the ECB Council,” he said. “Helicopter money is not necessary and I would be against it.”
In March, ECB President Mario Draghi was asked at a 3/10 press conference
about handing out helicopter money. He responded as follows:
“We haven’t really thought or talked about helicopter money. It’s a very interesting concept that is now being discussed by academic economists and in various environments. But we haven’t really studied yet the concept. Prima facie, it clearly involves complexities, both accounting-wise and legal-wise, for our view, but of course by this term ‘helicopter money’ one may mean many different things, and so we have to see that.”
Donald Trump has yet to opine on this subject. But he came close when he talked about the US government’s debt in recent days. On Monday, in a CNN interview,
Trump said, “People said I want to go and buy debt and default on debt, and I mean, these people are crazy. This is the United States government … First of all, you never have to default because you print the money …” He added that if interest rates go up, “we can buy back government debt at a discount. ... [I]f we are liquid enough as a country, we should do that.”
In a phone interview with CNBC
last Thursday, the presumptive Republican nominee for president said he would refinance the national debt to take advantage of current low interest rates. As of the end of March, the federal government owed about $14 trillion to the public, and was paying an average interest rate of 2.06%, down from just over 5.00% in 2007. “We’re paying a very low interest rate,” Trump said Thursday. “What happens if that interest rate goes up 2, 3, 4 points? We don’t have a country.”
In his 5/5 MarketWatch column, Rex Nutting
wrote, “The government paid $223 billion in interest in 2015, but that figure is expected to rise to $574 billion in 2021, under the assumption that the interest rate on a 10-year note will rise to 4.2% from 1.8% now. ... How would Trump’s refinancing plan work? The Treasury could buy back some of its debt (it did this in 2000), but the easier way would be to just refinance some of the debt as it matures, swapping maturing 2-year notes with 30-year bonds, for instance.” Nutting then covered the subject in depth as follows:
“The average maturity of debt has risen in the past few years, but not as much as it could have if the Treasury had sold more longer-term notes and bonds. The average maturity of publicly held debt had dropped to just 46 months in October 2008 as the financial crisis erupted. It’s now climbed back to 61 months, but that’s still below the peak of 74 months reached in the early 1990s, when the Treasury’s benchmark issue was the 30-year bond.
“The vast majority of the federal debt matures in the next five years. As of the end of March, about 30% of the publicly held marketable debt matured in the next year and another 41% matured in less than five years. Only 8% of the debt matures in 20 years or more. That means most of the debt is at risk of being rolled over when interest rates are higher.
“The Treasury could issue more long-term debt to extend the average maturity, but it has held back on the advice of the Treasury’s Borrowing Advisory Committee,
which is composed of the big Wall Street firms that operate the bond market, buying from the Treasury and selling to the public.
“The Treasury says it listens to the bond market when it decides on the mix of the maturities it offers because preserving a liquid and orderly bond market keeps costs low for taxpayers.
“That’s probably true, but the market is telling other bond issuers that it wants lots more long-term debt. The Treasury should sell more 30-year bonds, and even 50-year or 100-year bonds to meet that demand.” Nutting observed that the 100-year bond club currently includes Ireland, Belgium, Mexico, Ford, Disney, and Coca-Cola.
Even Bill Gross now supports the idea of helicopter money. After criticizing the central banks’ QE programs, he now thinks they should be used to finance more fiscal spending to counter the depressing impact of robots on labor demand. We aren’t making this up.
If you find this hard to believe, read his 5/4 Investment Outlook.
The Bond King wrote, “Money for free! Well not exactly. The Piper that has to be paid will likely be paid for in the form of higher inflation, but that of course is what the central banks claim they want. What they don’t want is to be messed with and to become a government agency by proxy, but that may just be the price they will pay for a civilized society that is quickly becoming less civilized due to robotization. [Emphasis is Bill Gross’.] There is a rude end to flying helicopters, but the alternative is an immediate visit to austerity rehab and an extended recession. I suspect politicians and central bankers will choose to fly, instead of die.”
(6) Titans of finance.
A 5/2 Business Insider article
observed, “One issue, however, is uniting some of the largest names in finance for one cause: fiscal stimulus. With big names including JPMorgan CEO Jamie Dimon and hedge fund billionaire Carl Icahn, it seems there is a growing chorus among the major players in finance that the government needs to spend more money.”
Icahn, who is a close adviser of Trump, noted in his 4/28 CNBC interview
that it is unlikely that much will happen on the spending front anytime soon. He said Congress was “grid-locked obsessed with this deficit to a point that I think it’s almost pathological.” We won’t be surprised if he and other titans of finance embrace the idea of helicopter money.
Dr. Ed Yardeni
is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.
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