Supersonic helicopters with stealth capabilities and formidable arsenals…
Helicopter money has been going through an important conceptual
transition this month. For years it was deemed the unthinkable last
resort option for policymakers. A no go area.
This week, however, when speculation bubbled over that Bank of Japan governor Haruhiko Kuroda would finally unleash the ultimate monetary weapon on the back of Ben Bernanke’s subtle endorsement of helicopter money policy as a real thing, the idea slipped conclusively into the realm of the possible.
Kuroda has since ruled it out. And to be fair, things have been brewing in this area for a while. Some might even say years.
But for a while at least, there seemed universal acknowledgement that this was a thing that could be done and hence might still be done in the months and years to come.
Over at Deutsche Bank strategists George Saravelos and Robin Winker reminded readers they had always argued the legal hurdles to helicopter money (mostly focused on preventing governments from abusing the tool for debt-financing reasons) were lower than is commonly assumed.
The biggest hurdles, they said, were the long established arguments against the tool. These include the fact heli-money is likely to be ineffective because households will simply save the money; that heli-money is a Ponzi scheme; that heli-money cannot be calibrated; that it’s a slippery slope to hyper-inflation and finally that heli-money is conceptually and thus politically unfeasible hence will never happen.
To all of the above, the strategists basically say meh.
In the first instance, there’s no reason to think heli-money will be hoarded because it would be perceived as a permanent windfall, and even then measures could be taken to enforce spending such as an expiry date.
To Mark Carney’s concern that heli-money is tantamount to unleashing a Ponzi scheme, the strategists say there’s no reason why central banks would need to be paid back because their balance sheets don’t need to balance in the conventional sense.
As to the fact it would be hard to calibrate Heli-money’s effectiveness, that’s the case with all financial stimulus. Arguably, they add, it’s even harder to calibrate the effectiveness and impact of negative rates.
And as to hyper-inflation, well, in light of the current state of inflation expectations, that’s unlikely to be a problem any time soon.
The political feasibility issue is harder to dispute, but even here say the strategists the compulsion to deal with a fast deteriorating economy could trump any unsavoury money printing memories. As they note:
As Edwards notes on Thursday there’s not really all that much difference between a perpetual zero-coupon government bond and charity:
But enough of that and time for a pop quiz. This one comes to us via email from former IMF-er Peter Stella.
B. Expand the central bank balance sheet?
C. Leave the central Bank balance sheet unchanged?
We’ll post the answer once we’ve seen at least a few deliberations.
This week, however, when speculation bubbled over that Bank of Japan governor Haruhiko Kuroda would finally unleash the ultimate monetary weapon on the back of Ben Bernanke’s subtle endorsement of helicopter money policy as a real thing, the idea slipped conclusively into the realm of the possible.
Kuroda has since ruled it out. And to be fair, things have been brewing in this area for a while. Some might even say years.
But for a while at least, there seemed universal acknowledgement that this was a thing that could be done and hence might still be done in the months and years to come.
Over at Deutsche Bank strategists George Saravelos and Robin Winker reminded readers they had always argued the legal hurdles to helicopter money (mostly focused on preventing governments from abusing the tool for debt-financing reasons) were lower than is commonly assumed.
The biggest hurdles, they said, were the long established arguments against the tool. These include the fact heli-money is likely to be ineffective because households will simply save the money; that heli-money is a Ponzi scheme; that heli-money cannot be calibrated; that it’s a slippery slope to hyper-inflation and finally that heli-money is conceptually and thus politically unfeasible hence will never happen.
To all of the above, the strategists basically say meh.
In the first instance, there’s no reason to think heli-money will be hoarded because it would be perceived as a permanent windfall, and even then measures could be taken to enforce spending such as an expiry date.
To Mark Carney’s concern that heli-money is tantamount to unleashing a Ponzi scheme, the strategists say there’s no reason why central banks would need to be paid back because their balance sheets don’t need to balance in the conventional sense.
As to the fact it would be hard to calibrate Heli-money’s effectiveness, that’s the case with all financial stimulus. Arguably, they add, it’s even harder to calibrate the effectiveness and impact of negative rates.
And as to hyper-inflation, well, in light of the current state of inflation expectations, that’s unlikely to be a problem any time soon.
The political feasibility issue is harder to dispute, but even here say the strategists the compulsion to deal with a fast deteriorating economy could trump any unsavoury money printing memories. As they note:
A recession would change the political trade-off between inflationary risks on the one hand and rising unemployment and deteriorating living standards on the other.SocGen’s Albert Edwards, meanwhile, deviates attention away from heli-money and over to the mode by which this unconventional monetary tool might be dispersed: the issuance of non marketable perpetual zero-coupon government bonds*.
As Edwards notes on Thursday there’s not really all that much difference between a perpetual zero-coupon government bond and charity:
Now don’t get me wrong, I’’m all in favour of perpetual government bonds. Indeed I used to hold the UK Government’s perpetual 3½% War Loan, issued in 1917 to finance the UK’s WW1 spending. But at least I actually used to receive a bi-annual coupon for doing my bit for the war effort that is until that pesky George Osborne redeemed it after almost 100 years, proving that unlike diamonds, perpetual government bonds are not forever. Maybe I’m getting old, or on the wrong medication, but I just can’t get my head around this brave new world where we lend the insolvent Japanese government our hard-earned money to receive nothing back from them, forever! We could just give it to them. But one thing is clear it is only a matter of time till US 10y yields converge with Swiss, Japanese and German bond yields in negative territory.He goes on:
Just after writing the front page, where I had been thinking about the mind-bending possibility of the Bank of Japan issuing zero-coupon perpetuals, a headline prompted me to think that even that was old hat conservative central banking. For the Wall Street Journal reports on a new research paper published on Monday entitled “The Central Bankers’ Bold New Idea: Print Bitcoins” where economists at the Bank of England advocated that central banks issue their own kind of digital currency. Using the US as a case study, they argued it could give a permanent boost to the economy of around 3%, as well as providing policymakers with more effective tools to tame financial booms and busts.At least in ancient times when the temples ran dry, the magic priest-type people had the decency to conjure up entertaining yarns about angry gods demanding public sacrifice.
I’m obviously underestimating central bank ingenuity. Clearly Vitas Vasiliauskas, governor of Lithuania’s central bank was right when he said recently that central bankers are magic people! His quote in full was “Markets say the ECB is done, their box is empty, but we are magic people. Each time we take something and give to the markets – a rabbit out of the hat.” They are indeed magic people and a few other things besides.
But enough of that and time for a pop quiz. This one comes to us via email from former IMF-er Peter Stella.
Does helicopter money:
A. Contract the central bank balance sheet?B. Expand the central bank balance sheet?
C. Leave the central Bank balance sheet unchanged?
We’ll post the answer once we’ve seen at least a few deliberations.
*We remember the days fixed income traders/brokers used to slip zero-coupon perpetual bonds into their quotes as a lark to trip up cub reporters — on the basis there was NO SUCH THING.
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