Most of what passes for modern monetary policy is nothing more than one assumption piled upon another (and then another, and so on). Taken for granted for so long, rarely are these unproven precepts ever challenged to justify themselves to the minimal standard of internal consistency, let alone prove discrete validity by parts. The latest is helicopter money, another sham in a long line of them proffered by at least one central bank today because it knows, as the others, nothing they have done has worked.
The fact that the world is even discussing the helicopter money option should instill great skepticism as a first impulse, not more rabid faith. The way this latest scheme is being described is exactly the same as quantitative easing was really not that long ago. Clearly the expectation for it is rising, as Bloomberg reported today that, “Nearly one-third of clients and colleagues surveyed by Citigroup Inc. think that so-called helicopter money could be on its way within a fortnight.” Forty-three percent in the same survey believed that the “market” was expecting it.
To do what? That is the question that is never asked because it is just accepted by economists and their media that the helicopter money, as QE, will perform as designed even though the last almost decade has proven beyond doubt that never happens.
Separately, Bank of America Merrill Lynch Chief Investment Strategist Michael Hartnett opined that helicopter money would be the best option to bring money into risk assets, a common goal of monetary stimulus, particularly of the unconventional variety.
Stocks are at record highs, and had made them regularly following QE3. And it didn’t have any impact on the economy whatsoever. The most charitable supposition is that it might have been worse (jobs saved rather than created) had stocks more accurately reflected even earnings rather than unhinged forward versions of them. Even that is dubious, because the entire idea of monetarism is nothing more than assumptions never before tested in the real world. QE sounded nearly fool-proof in the laboratories of Ivy League universities; put into action it has left many pining instead for something else.
Unlike QE, however, helicopter money has already been tested and it was done right here in the United States. Nobody remembers because it failed so spectacularly. As I wrote last Friday:
Here, too, the effect of such “stimulus” has been to shorten memories. The ARRA received all the attention and scorn, but lest we forget it was not the first. The Bush Administration, supported enthusiastically by Congress, the Federal Reserve and orthodox economists engaged in a tax rebate scheme during the first half of 2008. The government essentially paid people for being people, only it was distributed through tax credits rather than physical cash. Economists, undoubtedly, will object to the format as not being a proper “helicopter” but common sense prevails.
It may not have lingered long in our collective consciousness because of its actual purpose – to make sure the US didn’t fall into recession in 2008. Thus, it has been collectively rendered a minor footnote to the bigger events of the day.
The Economic Stimulus Act of 2008 is lost to history because it accomplished so little it wasn’t really worth any small effort in recalling it (and, as the ARRA, you can tell what won’t happen by the name applied to the law). It only now merits review because economists, like former Fed-Chair Bernanke, and its proponents are relying upon that achieved blindness to try to convince the world to do it all again. People actually received money from the government for nothing, which is the entire principle behind the “helicopter” particularly since it was financed at that time by an increase in the deficit, not taxes.
Bloomberg, in a separate article, helpfully defines what is helicopter money:
Imagine waking one morning to find extra cash in your account, a gift from your country’s central bank. That might sound outlandish — even some proponents of the idea admit it’s unlikely. But the concept of so-called helicopter money is being seriously debated by economists. The trillions of dollars, euros, yen and pounds that central banks have pumped into the global financial system since the 2008 credit crisis have failed to ignite global growth. Helicopter money handed directly to consumers, the theory goes, would send us scurrying to the shops to spend our windfalls, boosting confidence in the economy.
In the spring of 2008, that is exactly what happened; or at least the first part. Americans awoke after filing their taxes and found $600 for single filers, $1,200 for married couples and an additional $300 for any children in their “bank accounts” (all subject to income thresholds and sliding scales from there); or at worst a smaller actual tax liability in those amounts. It didn’t work in the slightest.
The problem then is as the problem now. Economists don’t have the least idea what is happening in and to the global monetary system. It is the same mistake as what “guided” QE, only one step further inward. QE failed because bank reserves are not money; bank activities and balance sheets are. NIRP is one admission of that fact, an attempt to impose a penalty upon the banking system to try to rectify QE’s great flaw. Helicopter money is an alternate but related effort to circumvent banks altogether.
The theory again sounds great in the vacuum of the classroom, but as 2008 proved there really isn’t much any monetary policy will do faced with an enormous wave of private monetary destruction. In fact, it was this direction that Milton Friedman himself actually contemplated in his 1969 essay The Optimum Quantity of Money that first introduced the money-copter.
Let us introduce a government which imposes a tax on all individuals and burns up the proceeds, engaging in no other functions. Let the tax be altered continuously to yield an amount that will produce a steady decline in the quantity of money at the rate of, say, 10 percent a year.
You can, as I would, argue that something like the ARRA accomplished exactly that, though wasting more nebulous resources than directly the money supply. But the point still stands. In this theoretical exercise, the money helicopter is the solution to this money “furnace.” Friedman argued that to counter such a process, the central bank would put back enough money sufficient to get the money supply “correct” once more. And here again the theory is piled upon assumptions: what is “enough”? What is “correct?”
These are difficult if not impossible questions to answer in any modern economic system, but the eurodollar version has imposed still another that leaves the chances of success as no better than QE: what is money? How can any government or central bank calculate the “optimum” quantity of money when they have proved over and over and over again they don’t even know what money is? Handing out some dollars to Americans, or yen to Japanese, doesn’t erase the further reduction of eurodollars all over the world.
And that is yet another hurdle for the helicopter to further cross beyond all that. Should Japan or even the US, if it ever gets that far, engage in it (again), it is set against a global background of falling money supply. The US might receive a temporary boost from it, but what good is that when the eurodollar supply of global money still further contracts? Orthodox theory still posits at most a slightly connected system of independent, geographically distinct economic systems. This closed system approach is wholly inappropriate in a eurodollar world that is almost completely unbounded.
From that perspective, even an international or global helicopter money program would be foolish. There is still the measurement problem at the start and then innumerable political and technical complications that must be solved in order to even make it theoretically possible in a manner resembling the theory. It is such a low probability scenario that the only reason for trying it, even thinking of trying it, is entirely non-economic; the politics of the status quo.
Occam’s razor would propose a far simpler solution – stop the monetary destruction in the first place. That would require, of course, replacing the eurodollar system, meaning that central banks would first have to recognize and admit it, thus rendering the entire basis of their current existence moot. And once you recognize that money isn’t and hasn’t been what they have been saying all these years, you start to wonder why you need these central bankers to begin with. The world is starting to think that way anyway, especially after the events of last summer and this past winter, demonstrating the motive behind the sudden urge on their part to start offering such “new” alternatives (hoping nobody remembers that it isn’t true).
Thus, from the perspective of economists and central banks the low probability option, no matter how close to zero, is for them the only option. The actual recovery scenario is the one where they play very little part, if none at all. In addition to having proven monetary policy nothing more than repeated academic exercises of inappropriate and simplistic assumptions, economists have also proven after more than a decade that they will not even conceive of a world that isn’t theirs to be saved, no matter how continuously it needs to be saved.
Courtesy: Jeffrey P. Snider
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