Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Dividend Aristocrat Is Leading the 5G Revolution - 22nd July 19
What the World Doesn’t Need Now is Lower Interest Rates - 22nd July 19
My Biggest 'Fear' For Silver - 22nd July 19
Reasons to Buy Pre-Owned Luxury Car from a Certified Dealer - 22nd July 19
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

The Truth Behind the Dangerous "Helicopter Money" Delusion

Interest-Rates / Quantitative Easing Sep 16, 2014 - 06:17 PM GMT

By: Money_Morning

Interest-Rates

Peter Krauth writes: Seeking out major trends and power shifts in the global economy is the part of my work that I enjoy most.

It's a lot of work, and needless to say, it involves constant research.

That's why a piece I recently read in Foreign Affairs absolutely shocked me...


The piece is a bit revolutionary, as its authors speak to a drastically different way of stimulating an ailing economy than the path we're on today.

In fact, the ideas and views are so radical that I couldn't help but wonder why the authors were taking such an unusual position. What I found was just as shocking as their views.

After all, their theories, and the policymakers who embrace them, pose an existential threat to all our wealth...

This Strategy Is (Quite Literally) an Old Joke

The article in question is "Print Less But Transfer More: Why Central Banks Should Give Money Directly to the People" by Mark Blyth and Eric Lonergan.

It appeared on the website ForeignAffairs.com and it is published by the Council on Foreign Relations.

Essentially, Blyth and Lonergan recommend a completely new approach to economic stimulation: Have the Fed create cash, and deposit it directly into people's bank accounts.

It's actually an idea the renowned economist Milton Friedman came up with in jest, and the origin of the phrase "dropping money out of a helicopter," which he famously quipped could be used to fight price deflation.

Ben Bernanke, while teaching economics at Princeton in 1998, also suggested the Bank of Japan could give cash directly to consumers to boost demand and kick-start inflation.

There are so many problems with this proposal as presented in Foreign Affairs, I hardly know where to start.

But let's take a look at just some of the assertions, and ideas that have me so fired up.

Like this one:

Today, most economists agree that like Japan in the late 1990s, the global economy is suffering from insufficient spending, a problem that stems from a larger failure of governance... It's well past time, then, for U.S. policymakers - as well as their counterparts in other developed countries - to consider a version of Friedman's helicopter drops. In the short term, such cash transfers could jump-start the economy. Over the long term, they could reduce dependence on the banking system for growth and reverse the trend of rising inequality. The transfers wouldn't cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them.

Are you kidding me? First of all, if most economists agree, then chances are they're wrong. What do the authors expect will happen when the Fed stops giving cash directly to citizens?

And what about the risk people will become dependent on even more government handouts? Already over 50% of American households receive some form of government benefits.

And what about the inflationary effects of just printing money, with no underlying productive economic activity (good or service) to justify this supposed "wealth"?

The Irrational Fear of Deflation

Come to think of it, if that were all it took, why isn't Zimbabwe the richest nation on the planet? Its central bank tried the solution of printing insane amounts of money.

In 1998 Zimbabwe's inflation rate was 32%. By 2008 it hit an astronomical monthly rate of 79,600,000,000%.

Eventually, Z$100 billion dollar notes were issued. The Zimbabwe dollar became so worthless that signs like the one above were posted in public restrooms.

Nevertheless, Blyth and Lonergan continue:

Other governments have still followed Bernanke's lead. Japan's central bank, for example, has tried to use its own policy of quantitative easing to lift its stock market. So far, however, Tokyo's efforts have failed to counteract the country's chronic under-consumption...And some countries, such as Portugal and Spain, may already be experiencing deflation. At best, the current policies are not working; at worst, they will lead to further instability and prolonged stagnation.

Governments are terrified of deflation because of the massive debts which they know they will never be able to repay, or admit. Deflation increases the value of debt making it more costly. All they can do is try to create inflation so that the future cost of the debt becomes manageable.

But deflation is actually positive for the average person. Prices of goods and services decline, allowing the same income to buy more.

As Money Morning Special Contributor Jim Rickards describes in his recent book The Death of Money, former Japanese deputy finance minister Eisuke "Mr. Yen" Sakakibara understands this phenomenon. He explains Sakakibara's view that "...because of Japan's declining population, real GDP per capita will grow faster than real aggregate GDP. Far from a disaster story, a Japan that has deflation, depopulation, and declining nominal GDP can nevertheless produce robust real per capita GDP growth for its citizens. Combined with the accumulated wealth of the Japanese people, this condition can result in a well-to-do society even in the face of nominal growth that would cause most central bankers to flood the economy with money."

This is exactly what we've seen with the "Abenomics" phenomenon.

Rickards continues:

Sakakibara's insights, that monetary remedies will not solve structural problems, and that real growth is more important than nominal growth, are being ignored by central banks in both the United States and Japan. The Federal Reserve and the Bank of Japan will pursue the money-printing pseudo-remedy as far as possible until investors finally lose confidence in their currencies, their bonds, or both. Japan, the canary, will likely suffer this crisis first.

On the other hand, Blyth and Lonergan write:

The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.

Such an approach would represent the first significant innovation in monetary policy since the inception of central banking, yet it would not be a radical departure from the status quo. Most citizens already trust their central banks to manipulate interest rates [emphasis added].

How do these guys know that "Most citizens already trust their central banks to manipulate interest rates"?

Besides, can any statement be more misleading? They admit interest rates are "manipulated." Yet they claim citizens "trust" their central bank to do this. Newsflash: nearly one year ago, a Pew Research Center report indicated that just 19% of Americans surveyed said they trust the federal government to do what is right just about always/most of the time, right near an all-time low.

Finally, Blyth and Lonergan make their most outrageous assertion:

Conventional accounting treats money - bank notes and reserves - as a liability. So if one of these banks were to issue cash transfers in excess of its assets, it could technically have a negative net worth. Yet it makes no sense to worry about the solvency of central banks: after all, they can always print more money... Moreover, many American conservatives consider cash transfers to be socialist handouts.

I can hardly contain my laughter. Central banks are supposed to be the backstop for the banking system. We should all worry about their solvency, especially when they keep printing more money. That's exactly the sort of thing that destroys people's confidence in them.

Blyth and Lonergan state the obvious in such a nonchalant way, it's clear they figure their ideas are quickly becoming conventional thinking.

I also have to give credit where it's due. Sometimes stating the obvious is not that easy. Cash transfers are socialist handouts, especially if you're targeting the bottom 80% of households. That's because inflation caused by the printed money becomes a cost to all of society, but in particular it becomes a wealth transfer, especially from those with savings to those without.

Here's what's really happening here...

This Is More Sinister Than Just Policymakers' Popular Delusions

Most of the suggestions and arguments put forward in this article are so nonsensical, I'd be embarrassed to put my name to them.

It even made me wonder if the authors could be misleading readers. Well, if you look a little deeper into the organization behind the article, that just may be your conclusion.

You see, Foreign Affairs is published by the Council on Foreign Relations (CFR). Sure, there are lots of prominent leaders, business people, and media who are members. But it's often their influence and what they do with it that's the problem.

This is nothing other than the fox guarding the chicken coop, and Jim Rickards revealed this fundamental conflict of interest in The Death of Money:

The members of the [former Treasury Secretary] Robert Rubin clique are extraordinary in the incompetence they displayed during their years in public and private service, and in the financial devastation they left in their wake.

Rubin and his subordinate and successor, Larry Summers, promoted the two most financially destructive legislative changes in the past century: Glass-Steagall repeal in 1999, which allowed banks to operate like hedge funds; and derivatives regulation repeal in 2000, which opened the door to massive hidden leverage by banks... The lost wealth and personal hardship resulting from the Rubin clique's policies are incalculable, yet their economic influence continues unabated. Today, Rubin still minds the global store from his seat as co-chairman of the nonprofit Council on Foreign Relations [emphasis added].

Let's sidestep this self-serving "journalism" altogether...

A Better Source of (Impartial) Information

Money Morning has published some of my best research over the years, and, unlike Robert Rubin or the Council on Foreign Relations, I've got no incentive to steer you toward a particular investment, push a philosophy, or pull the wool over your eyes.

We published this research to help save you from making a critical investment mistake - and, just as importantly, seize great opportunities in resource investment. Here are three of the best...

Bigger Than Gold: The Precious Metal That's Primed to Double

Last Chance: The Greatest Silver Buying Opportunity in History

Gold Forecast 2017: How the Yellow Metal Hit $5000

Real wealth won't come through half-baked government and central banking schemes, but through hard work and saving. And that work is much easier with the right information.

Source : http://moneymorning.com/2014/09/16/the-truth-behind-the-dangerous-helicopter-money-delusion/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules