Janet Yellen: the Fed’s “It’s Worth A Shot” Gunslinger
[courtesy Google Images]
It’s about government trying to stimulate the economy by handing out free “helicopter money” directly to all the people rather than to the “too big to fail banks”.
Casey Research explained:
“Economist Milton Friedman coined the term “helicopter money” in the 1960s. He said that in the event of an economic contraction, the government could drop free cash from helicopters to stimulate the economy. People would spend the free money, causing the economy to grow. Friedman likely never took the cartoonish idea seriously. However, last week, former Fed chairman Ben Bernanke said helicopter money could be worth a shot.”
Gee, there’s a slogan sure to inspire public confidence: “Helicopter money—it’s ‘worth a shot!”
In fact, Bernanke’s language cuts confidence. He sounds about as competent as a high school sophomore experimenting on a dying lab rat in biology class who says, “Let’s give ‘im a shot of the stuff in the green jar—maybe that’ll help.”
Bernanke continued:
“[H]elicopter 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
“To implement, the government would likely give out free cash by mailing checks to people, or depositing money directly into people’s bank accounts.”
“Under certain extreme circumstances—sharply deficient aggregate demand . . . exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies—such programs [“Helicopter Money”] may be the best available alternative. It would be premature to rule them out.”
Bernanke implicitly argues that:
- Our current economic circumstances are “extreme”;
- Total consumer demand is down;
- The Federal Reserve is exhausted and unable to provide more monetary stimulation (QE) for the economy;
- Congress can’t or won’t borrow enough money to stimulate the economy back to a “recovery”. And, therefore, since nothing else works,
- They might as well “take a shot” at “Helicopter Money”. What can we lose, huh?
If “Helicopter Money” doesn’t work, maybe Obama will try begging consumers to please, please go out and buy something.
Casey Research:
“Therefore, economists are considering the distributions of another dose of ‘helicopter money’—but this time give it directly to the people instead of the banks.
“Nouriel Roubini is one the world’s most influential economists. He recently wrote an article entitled “Central Bankers May Have to Fire up the Helicopters.”
“Richard Clarida, an economist at Columbia University, predicts we will see helicopter money within five years.
Five years? Nowadays, predictions of that length make me smirk.
Today’s world is so unstable, volatile andunpredictable, that you’ve got to be a prophet to make accurate predictions for five weeks from now.
In the next five years, we’ll likely see recession, depression, inflation, deflation, a new currency, an economic collapse, a recovery, and maybe a nuclear World War III. More significant event may happen in the next five years than have happened in the past 25 or even 50.
But right now, we keep hearing from the Fed that:
1) The Federal Reserve is out of tricks and is incapable of using previous monetary strategies (like QE and ZIRP) to revive the economy; and
2) The federal government is unwilling or unable use fiscal policy (meaning more taxes, benefit cuts, or more borrowing) to shore up the economy.
I believe the Fed is telling (or implying) the truth. I believe the Fed is currently incapable of doing much more to “stimulate” the economy with monetary policy.
If the Fed’s not fibbing, then only the federal government remains to save us with fiscal policy that focuses on raising (or lowering) taxes, borrowing more (or less) currency, and/or increasing (or cutting) entitlements.
• But this is an election year. In fact, it’s one of the most extraordinary election years anyone’s seen since WWI.
If this wasn’t an election year, maybe the federal government could implement a new fiscal policy that raised taxes, cut benefits or borrowed more to stimulate the economy. That new fiscal policy would be painful and unpopular, but it might actually work to revive the economy. However, given the coming election, no politician wants to risk enraging voters by raising taxes or cutting entitlements.
Thus, it’s very unlikely that government will make a significant change in fiscal policy during the balance of A.D. 2016.
• Ten years ago, faced with similar economic problems and without the inhibitions imposed by election-year politics, the federal government might not have raised taxes or cut benefits. (When, since WWII, has government ever raised taxes or cut benefits sufficiently to repair economic problems?) But government could’ve “kicked the can further down the road” by just borrowing more currency to inject into—and thereby stimulate—the economy.
However, for the past several years, private lending sources previously available to government have largely dried up. Creditors suspect that the U.S. government won’t be able to repay its staggering National Debt and is therefore reluctant to lend more to Uncle Sammy.
Result? Since the onset of the Great Recession, the Federal Reserve has become the “lender of last resort” and the federal government’s principle source of borrowed currency.
But. For the past 12 to 18 months, the Federal Reserve has been feeding us a growing diet of “there’s nothing else we (the Fed) can do”.
As I wrote previously, I believe them. And when the Federal Reserve says “there’s nothing else that we can do,” I believe they mean that they can’t lend much more additional currency to the federal government.
• Contrary to popular belief, the Fed can’t “spin” more fiat dollars into existence by simply firing up the printing presses. There are limits. The Federal Reserve appears to be close to those limits and therefore can’t lend much more.
Principle among those limits may be the Fed’s balance sheet. I doubt that the Fed can “spin” more fiat dollars into existence without causing their balance sheet to fall deeper into negative territory where their debts exceed assets and the Fed may become technically bankrupt..
I’m sure that the private owners of the Federal Reserve don’t want to push their balance sheet closer to technical bankruptcy. But, regardless of what the Fed’s owners may want to do, I doubt that they’re even capable of safely “spinning” much more fiat currency into existence. I think they’ve hit an accounting limit that prevents them from printing more “Helicopter Money”.
If I’m right, the government can’t borrow more currency to paper over its current debt problems. Private creditors refuse to lend much more to the federal government and the Federal Reserve may be likewise unable or unwilling to lend more to the federal government.
• The private lenders’ refusal to continue to support government in the style it’s become accustomed to can’t be a surprise. In the past seven years of the Obama administration, the National Debt has doubled. President Obama has borrowed more money than all of the previous 43 presidential administrations combined.
Do you need a PhD in economics or accounting to realize that maybe, just maybe, the federal government is now so deeply indebted that it’s become a bad credit risk and you shouldn’t lend it any more currency or trust it to manage your wealth?
If the Federal Reserve can’t print enough new dollars to stimulate the economy, and the federal government can’t borrow enough new currency to to stimulate the economy, the federal government has only three solutions left to escape its debt problems and stimulate the economy: 1) raise taxes; 2) cut benefits; and/or 3) initiate hyperinflation to reduce the real size (purchasing power) of the massive National Debt.
• But, again, 2016 is an election year. No incumbent politician is willing to antagonize the voters and risk losing his job just to do what’s necessary—but painful—to save the US economy. In fact, no incumbent politician is even willing to break the bad news to voters: the National Debt is too big to be repaid in full and therefore promises of pensions, So-So Security, entitlements, subsides and welfare will have to be substantially repudiated.
Those Americans who think they’re going to get a substantial sum of currency from the federal government over the next several years are in for a surprise. No one wants to talk about that surprise because everyone is pretty sure it will be massive, shocking and painful.
Therefore, I suspect that between now and the November election that—unless we see a real economic catastrophe in the meantime—the Federal Reserve can’t, and the federal government won’t make any changes in monetary or fiscal policies that are likely to significantly stimulate and revive our economy.
I don’t think we’ll see “helicopter money” from the Federal Reserve in A.D. 2016. I’m sure we won’t see tax increases from the federal government this election year. I doubt that we’ll see any significant increase in borrowing by the federal government. There could be some reductions in benefits, but they’ll be relatively minor and unlikely to provoke widespread rioting among government’s dependents—at least not until after the election.
Assuming that we don’t fall into an economic collapse before the November election, you can bet that our circumstances will be so dire in A.D. 2017, that we will then see higher taxes and/or substantial cuts in entitlements and/or the beginning of hyperinflation. But I still doubt that the federal government will be able to freely borrow as much as it has in the past. I think big government’s “days of wine and roses and unlimited borrowing” are just about finished.
In fact, I think that after Obama leaves office, his “signature achievement” won’t be Obamacare but the fact that he’s just about destroyed the U.S. government’s credit rating and ability to go deeper into debt. The next President and Congress will have to find a way to maintain the economy without much more borrowing. Americans will scream. That’ll be unpleasant but possibly necessary and probably good—in the long run—for our economy.
For the moment, however, “Happy Daze” are here again.
Well, maybe not all that “happy” just now, but far happier than they’re going to be starting in A.D. 2017. In fact, the day may be coming when Americans long for the “good old days” when President Obama ruled the roost. Until after next November’s elections, these are the “good old days”. You’d better enjoy them while you can.
But, starting in A.D. 2017, Katy bar the door!
Our “happy daze” of big borrowing, low interest, low inflation, low taxes, and substantial entitlements will vanish into the myths of time. America will soon be forced to face and accept hard economic realities rather than economic theories and fantasies like QE, ZIRP, NIRP and “Helicopter money”.
• I doubt that any of us will enjoy the coming reality. I also doubt that any of us can stop it from coming.
What we can stop is being a government dependent.
Government is going to fail. It’s borrowed as much money in the past 7 years as it had borrowed in the previous 228 years. If can’t raise taxes very much in a recession. It can’t borrow more money. It therefore can’t pay it’s existing debts.
That means the existing debts (including welfare, subsidies, entitlements, pensions and So-So Security) must be repudiated, at least in part.
And that means that those Americans who rely on government for their financial support are in for a big and painful surprise.
Therefore, I suggest that every Americans find a way to support himself without relying on government welfare, pensions, entitlements and subsidies. Protect your savings. Cut your expenses. Get a job or a skill that might last through the coming debacle.
• Of course, I could be wrong. Things may not be as grim as I suggest. Maybe our “circumstances” aren’t as “extreme” as Mr. Bernanke has implied. Maybe economic “stimulation” will suddenly take hold and the economy will shine.
But, even if all that were true, would you be hurt by following my advice to protect your savings, cut your expenses, and get a job, skill or business that could support you in tough times?
On the other hand, if I’m right and you don’t follow my advice, what’ll happen to you?
To paraphrase an old cliché, “a year of prevention is worth a decade of cure.” We might still have a year—or at least six months—to get ready for the coming debacle.
In our “take a shot” economy, it’s time for all of us to buckle up.
