Money” is Coming: Will it Work or Add to the World’s Death Spiral?
by Victor Sperandeo with the Curmudgeon
Despite numerous round of QE, ZIRP, and even negative interest rates in some countries, the global economy continues in secular stagnation mode with almost no economic growth anywhere. It appears that all the newly created central bank money was not effectively “transmitted” to the real economy to produce self-sustaining growth. Instead, it’s flowed into financial markets, creating numerous bubbles and “free money parties” as we’ve described in so many previous Curmudgeon blog posts.
In the main body of this post, Victor provides his assessment of several economists and authors who’ve suggested giving people newly created (“printed”) money to stimulate the economy. This hypothetical and unconventional proposal is known as “helicopter money1” as it’s equivalent to dropping money from a helicopter for people to spend.
Note 1. “Helicopter money” was first mentioned by world famous economist Milton Friedman. It gained much more notoriety after Ben Bernanke made a reference to it in a November 2002 speech, when he was a new Federal Reserve governor.
Extraordinary low interest rates for eight years have caused an explosion in corporate debt. Most of the money obtained from newly issued corporate bonds and notes has been used to finance acquisitions, buy back stock and pay shareholder dividends. Such financial engineering makes after tax earnings per share look much higher than it is plus the added debt increases leverage (ratio of debt to assets).
An October 18th WSJ
article titled Investors Unfazed by Borrowing Increase (on line
subscription required), reported on the problems of corporate debt buildup:
forward to 2016 and gross leverage is now markedly higher than it was in 2007,
just before the onset of the 2008 credit crisis,” said the HSBC strategists.
The problem is that the borrowing binge can’t last forever, a worry that Fed officials flagged this week. As leverage keeps climbing, corporate balance sheets inch toward a breaking point. Already, the number of global corporate bond defaults ticked up to 133 so far this year, on pace to be the highest since 2009, according to S&P Global Ratings.
USA Today echoed that theme in an October 20th article
on soaring corporate debt defaults.
So far this year, 132 companies across the globe have defaulted on their debt, which is 55% more than during the same period a year ago, says Standard & Poor's. More companies have already defaulted this year through early October than during all of 2015. The number of defaults hasn't hit these levels since 233 companies defaulted in 2009.
Fed Head Has Plenty of
Questions, but No Answers (Curmudgeon):
On October 14th,
at a conference organized by the Federal Reserve Bank of Boston, Fed Chairwoman
Janet Yellen seemed to be clueless on what the US central bank should do next
to stimulate economic growth. Here are a
couple of choice quotes from her speech:
aftermath of the 2007-2009 financial crisis has revealed limits in economists'
understanding of the economy."
“In light of the housing bubble and subsequent events,
policymakers clearly need to better understand what kinds of developments
contribute to financial crises. What is the relationship between the buildup of
excessive leverage and the value of real estate and other types of collateral,
and what factors impede or facilitate the deleveraging process that follows?
Does the economic fallout from a financial crisis depend on the particulars of the crisis, such as whether it involves
widespread damage to household balance sheets? How does the nature and degree
of the interconnections between financial firms affect the propagation and
amplification of stress through the financial system and overall economy? Finally,
and most importantly - what can monetary policy and financial oversight do to
reduce the frequency and severity of future crises?”
Could “Helicopter Money”
be the next Fed remedy to spur US economic growth?
David Rosenberg Interview
David Rosenberg is a popular Canadian economist who was recently
interviewed by Real VisionTV (subscription
required). During the interview, he
suggested the Fed should buy a newly issued 100-year Treasury bond of "$2
TRILLION" at any interest rate. The Fed would remit the bulk of that money
to the US Treasury, which would then spend the money. Voila, a big fiscal stimulus would save
the US from recession!
This is a take-off on the 2011 suggestion of minting a platinum trillion-dollar coin which resurfaced in March 2015.
Evidently, Mr. Rosenberg
thinks the Fed and US Treasury can bypass Congress by doing this? Legally, it cannot be done unless Congress
looks the other way. The US Constitution Article 1, Section 7, begins (emphasis
bills raising REVENUE shall originate in the House of Representatives; but the
Senate MAY propose or concur with Amendments as on other Bills."
Zero Hedge quotes
Rosenberg as saying:
you do with helicopter money is you finance it off the central bank's balance
sheet because we're talking doing something very dramatic to reflate the
economy,” Rosenberg said. “It's not a few hundred billion dollars. It's a
couple of trillion...I know I'll get accused of bailing out the sinners, but,
my lord, we've already done that. I mean, nobody went to jail.”
Steve Keen from his book
"Developing Economics for the Post-Crisis World" (Victor):
Mr. Keen suggests giving
money to people directly to pay down debt. He is a very decent economist, and
has good intentions. His details are not clear, but basically he wants to get
rid of the "pile of elephant dong" i.e. private debt, by giving cash
to people who have debt to pay it down. How much per person $1000 or $10,000
(?) is not clear. This will never happen!
FT Op Eds: Wire Newly Printed Money into People’s
Over the last two years,
several FT editorial writers suggested central bank printing currency or a fiat
paper "nominal " monetized tax cut. The idea is to wire 3 to 10
thousand euros, pounds, dollars, etc. into citizens’ bank accounts until the
economy grows. Some suggest doing so for
three years. Can you believe that?
None of the FT editorial
writers promote tax rate cuts. It’s only occurred three times since 1913. Under President’s Coolidge, Kennedy, and
Reagan tax cuts led to GDP growth compounded rates of 4.78%, 4.85%, 4.42%,
respectively for seven years each.
Conversely, under printing
and gifting people printed currency led to hyperinflation in 1920’s Germany.
The choice of government
policy is a matter of the social system desired by the political leaders. What
is incredible is convincing the people to accept anything, even if it’s not
been successful in history.
As few people study history2,
and as governments do not wish to teach history, what has been created is the
science of psychological advertising to convince the people, with a great deal
of lying implied, to accept what will punish the people and reward politicians
Note 2. History
provides an extensive evidential base for the contemplation and analysis of how
societies function. History helps us
understand change and how the society we live in evolved. Also, history shows
how the past caused the present, and so is a precursor for the future.
“Paper money eventually returns to its intrinsic value – zero.” (Voltaire, 1694-1778) Often Rather Quickly.
value of fiat currencies is entirely based on faith. When I wrote this, as
others have, I had no idea just how "quickly" this process takes
Regardless how it happens, it certainly appears that fiat currencies have a pronounced tendency to fail in de jure or at the very least de facto terms with time being the only relevant variable.
Good luck and till next time...
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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