Helicopter Money
[courtesy Google Images]
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1) The Federal Reserve wields the monetary powers which include control over interest rate and over the supply of currency.
2) The U.S. government wields the fiscal powers which include raising or lowering taxes, raising or lowering borrowing, and increasing or decreasing government spending on benefits, subsidies and wars.
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For the past year, we’ve heard the Federal Reserve say repeatedly that:
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1) The Federal Reserve has exhausted its monetary powers and is no longer capable of using previous, “conventional” monetary strategies like QE (Quantitative Easing; printing and injecting more currency into the economy) and ZIRP (near-Zero Interest Rate Policy) to stimulate the economy back to a “recovery”.
I believe the Federal Reserve’s claims that it’s currently helpless to do much more to “stimulate” the economy with monetary policy are true.
If the Fed’s not fibbing, then only the U.S. government remains to engineer an economic “recovery” by means of its fiscal policy. However,
2) The U.S. government is unwilling or unable use its fiscal powers to raise taxes and/or borrow more currency to provide enough additional “stimulation” to cause an economic recovery.
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• The problem appears to be debt. Since the Great Recession began in A.D. 2008, the government sold U.S. bonds (debt instruments; promises to pay) to the Federal Reserve in exchange for fiat dollars that were then spent, loaned or otherwise injected into the U.S. economy. The government went into debt (issuing bonds) in order to acquire more fiat dollars from the Fed.
As a result of its desperate determination to stimulate the U.S. economy, the U.S. government’s “official” National Debt has doubled from $9.7 trillion in A.D. 2011 to nearly $20 trillion, today. It took about 220 years for the National Debt to reach $9.7 trillion in A.D. 2011. It took just five more years, for that debt to double to $20 trillion in A.D. 2016.
Most Americans, if they even bother to consider the recent, extraordinary growth of the National Debt, find that doubling to be unremarkable. No big deal, right? The government can handle it, can’t they?
I don’t think so. I think that doubling the official National Debt in just five years (primarily for the purpose of stimulating the U.S. economy) is scary.
First, government spent an incredible amount of borrowed currency to stimulate the U.S. and global economies and received almost nothing in return. The U.S. economy didn’t collapse, but it didn’t recover, either. The fact that so much additional fiat currency failed to stimulate a recovery is evidence of enormous systemic problems that are still present and likely to soon collapse our economy.
Second, as I’ve argued for years, the National Debt has grown too large to ever be repaid in full or even by 50%. Sooner of later, government will be forced to admit that it can’t pay the National Debt. When that happens, the whole debt-based monetary system and debt-based economy will slide into calamity.
Third, the National Debt has grown so huge that the U.S. government is at least reluctant, and perhaps even unable, to go deeper into debt. Some think we’re at or near “peak debt”. If so, the U.S. government can’t borrow enough additional currency from the Federal Reserve and/or private American and foreign investors to stimulate the economy to the same extent seen in QE episodes 1, 2 and 3.
We seem to be between the rock and the hard place.
But what if government could cause more fiat dollars to be injected into the economy without going any deeper into debt?
• Casey Research published an article entitled, “Let’s Try Giving Out Free Cash”. The title alone is fascinating: simultaneously attractive (we’d all like to receive “free cash”) and repulsive (how can real money be “free”?).
Yes, yes—when you were a kid, it was great when Aunt Jane gave you a Christmas card that held a $100 bill. As a child, you loved that “free money”. But, as an adult, isn’t the idea of “free cash” to everyone (not just you) a little unnerving?
According to Casey Research, in order to finally cause the fabled economic “recovery”,
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“Central bankers are considering “helicopter money”.
“Economist Milton Friedman coined the term ‘helicopter money’ in the 1960s. He said the government could drop free cash from helicopters to stimulate the economy. People would spend the free money, causing the economy to grow.
According to Ben Bernanke, “Helicopter money could prove a valuable tool since it should work even when more conventional monetary policies are ineffective and the initial level of government debt is high.”
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Note Bernanke’s reference to the “level of government debt” being “high” (maybe “too high”?). Bernanke implies that “helicopter money” is a consequence of extremely high government debt. But what, exactly, is the nature of the relationship between high government debt and “helicopter money”?
As you’ll read, the fundamental idea behind true “helicopter money” may be that it’s possible to inject more fiat currency into the economy without increasing the already-unpayable National Debt.
Casey Research continues:
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“To implement, the government would likely give out free cash by mailing checks to people, or depositing money directly into people’s bank accounts.
“Friedman likely never took the cartoonish idea seriously. For a long time, no one else did either—until recently, when former Fed chairman Ben Bernanke said helicopter money could be ‘worth a shot’.”
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“Worth a shot”? Is that how the geniuses at the Federal Reserve run the economy? Based on strategies that might be “worth a shot”?! Let’s roll the dice and see what happens?
Again, we see evidence that no one is really in control. The economy is being run as an experiment to test new theories rather than as an entity that’s well-understood and subject to predictable control.
Mr. Bernanke’s “worth a shot” language reveals just how little real control the Fed has over the economy. He does not inspire confidence.
Bernanke continued:
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“Under certain extreme circumstances [our economy’s circumstances are now deemed to be ‘extreme’]—sharply deficient aggregate demand [people aren’t purchasing and consuming enough goods and services to stimulate the economy], . . . exhausted monetary policy [the Federal Reserve has become helpless and unable to cause an economic ‘recovery’], and unwillingness of the legislature to use debt-financed fiscal policies [Congress is unwilling or unable to go deeper into debt to stimulate the economy and is therefore also, like the Fed, helpless and unable to cause an economic ‘recovery’]—such programs [‘helicopter money’] may be the best available alternative. It would be premature to rule them out.”
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In other words, the Fed and the government have tried everything else and exhausted the Fed’s monetary powers and the government’s fiscal powers without success. Therefore, Bernanke recommends that the drowning Federal Reserve try grasping at the “straw” of last resort: “helicopter money”.
Bernanke’s reference to the “unwillingness of the legislature to use debt-financed fiscal policies” strikes me as odd. He didn’t expressly say so, but he faintly implied that since Congress can’t or won’t go deeper into debt to stimulate the economy (as they did with QEs 1, 2, and 3), then maybe the Federal Reserve could still simply print “helicopter money” without government being forced to print and issue more U.S. bonds.
Recognizing that government can’t or won’t go deeper into debt, Bernanke seems to say, “OK—let’s bow to reality. If government can’t issue, say, another $5 trillion in bonds to be sold to the Fed in return for $5 trillion in fiat currency, then the Fed should simply print and distribute another $5 trillion in ‘helicopter money’ that is unbacked by government bonds.
The Fed would simply issue fiat dollars directly to the people or to the government, without demanding a U.S. government bond in return.
No bond; no debt.
Again, Bernanke didn’t actually say that, but it makes some sense. After all, why issue government bonds to the Federal Reserve in return for more fiat currency, if the bonds will never be repaid, anyway? Why waste time printing U.S. bonds that won’t ever be repaid? Why not eliminate the government bonds and let the Fed simply print however much “helicopter money” (unbacked by even the illusion of U.S. bonds) seems necessary to stimulate an economic recovery?
If the idea of issuing fiat dollars without government first selling bonds to the Fed seems fantastic, remember that both President Lincoln issued “greenbacks” during the Civil War and President Kennedy attempted to issued “greenbacks” in the 1960s. In both instances, these “greenbacks” were issued by the U.S. Treasury and weren’t tied to the Federal Reserve or backed by U.S. bonds or gold. (Coincidentally, both Lincoln and Kennedy were assassinated.) My point is that a kind of “helicopter money” has actually been issued by Lincoln and was attempted by Kennedy. The concept of currency creation without debt creation is not unprecedented.
Bernanke’s proposed “helicopter money” would be virtually identical to Monopoly Money. It would be absolutely nothing more than pieces of paper and electronic digits without the least trace or illusion of being backed by U.S. bonds. “Helicopter money” wouldn’t even result in paying 1% interest on bonds. This “helicopter money” would be functionally identical to the quadrillion-dollar bills issued by Zimbabwe in A.D. 2009.
If so, “helicopter money” could be code for hyperinflation—the unlimited printing of fiat currency. Has Bernanke subtly proposed the government and Fed implement hyperinflation?
• Casey Research continued:
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“After all, the Fed has created 3.5 trillion new “helicopter” dollars since 2008–and given most of those dollars to ‘too big to fail banks’.”
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Not necessarily.
Suppose my speculation—that real “helicopter money” is, by definition, unbacked by any U.S. bonds—turned out to be true. If so, the $3.5 trillion created by the Fed since A.D. 2008 would not be true “helicopter money” since it was all backed by U.S. bonds. It was not completely “free” currency since, even if the principal represented by these U.S. bonds were not repaid, they still paid interest. However, if “helicopter money” was not backed by U.S. bonds, the issue of such currency wouldn’t even cost any interest.
Perhaps, the last times we saw true “helicopter money” were in our own Civil War in the 1860s, in the Weimar Republic in the early 1930s, and in Zimbabwe during the 2000’s. That’s when governments tried to inflate or hyperinflate their debts away by printing pure fiat currency unbacked by gold or government bonds—but only succeeded in diminishing or destroying their own currencies and economies.
Could it be that smiling Ben Bernanke’s recommendation of “helicopter money” is nothing more than an admission that the economy is so fragile, so certain to implode anyway (and soon), that Fed might just as well try to buy a few more years by instigating hyperinflation? Is the Fed faced with choosing between: 1) dying of “natural (economic) causes” within the next six months; and, 2) committing a slow suicide by hyperinflation that won’t kill it for another three years?
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• I believe big government’s “days of wine and roses and unlimited borrowing” are just about finished.
If government is so deeply in debt that it can’t go much deeper into debt, government has only four options left to escape or at least postpone its current debt problems: 1) raise taxes; 2) cut benefits and spending; 3) expressly repudiate the existing National Debt by declaring (admitting?) it’s bankrupt; and/or, 4) initiate hyperinflation to stealthily reduce the real value (purchasing power) of the government’s debt; or
Raising taxes is bad politics since it will make the masses scream.
Likewise, cutting benefits and spending is also bad politics since it will make government dependents riot.
Government would rather expressly declare WWIII than declare/admit that it’s bankrupt.
That leaves hyperinflation as the only option that won’t (initially) make the voters scream. An episode of, say, 50% hyperinflation could effectively reduce the existing debt by 50%. If we had 90% hyperinflation, the existing debt could be reduced by 90%. Once the existing debt was sufficiently reduced, creditors might again be willing to lend massive amounts of currency to our government.
If “helicopter money” is a pure, fiat currency that’s unbacked by U.S. bonds and therefore doesn’t add to the National Debt, it sounds it could be a code for hyperinflation.
Ben Bernanke expressly recommended “helicopter money”. Was he really recommending hyperinflation as the “next big theory” to be tested on our experimental economy?
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• Relatively speaking, “Happy Days” may be here again and might remain until after next November’s election. After that, Katy bar the door! Our happy daze of big borrowing, near-zero interest rates, low inflation, low taxes and substantial entitlements and subsidies may vanish into the mists and myths of time. America may soon be forced to face and accept economic reality rather than economic fantasies like QE, ZIRP and “helicopter money”.
I doubt that any of us will like the coming reality. I also doubt that any of us can stop it from coming—not even with “helicopter money”.