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It Begins: Australia's Largest Investment Bank Just Said "Helicopter Money" Is 12-18 Months Away
Just over two years ago, when the world was deciding who would be Bernanke Fed Chair replacement, Larry Summers or Janet Yellen (how ironic that Larry Summers did not get the nod just because a bunch of progressive economists thought he would not be dovish enough) we wrote about a different problem: with the end of QE3 upcoming and with the inevitable failure of the economy to reignite (again), we warned that there remains one option after (when not if) QE fails to stimulate growth: helicopter money.
While QE may be ending, it certainly does not mean that the Fed is halting its effort to "boost" the economy. In fact... the end of QE may well be simply a redirection, whereby the broken monetary pathway, one which uses banks as intermediaries to stimulate inflation (supposedly a failure according to the economist mainstream), i.e., "second-round effects", is bypassed entirely and replaced with Plan Z, aka "Helicopter Money" mentioned previously as an all too real monetary policy option by none other than Milton Friedman and one Ben Bernanke. This is also known as the nuclear option.
Today, one day after the Fed according to some finally lost its credibility, none other than Australia's largest investment bank, Macquarie, just made the case that helicopter money is not only coming, but has a "very high" probability of commencing its monetary paradrops over the next 12-18 months.
Time for a policy U-turn? Back to the future: British Leyland
From conventional QEs to more unorthodox policies…
As discussed (here and here), we do not believe that investors are likely to benefit from acceleration in growth rates, trade or liquidity and indeed on the contrary, negative feedback loops from EMs to DMs imply that neither would be able to support global growth. Secular stagnation is the key explanatory variable (here). The deflationary pressures from overleveraging, overcapacity and technology shifts can be either allowed to work through economies or public sector needs to continue resisting via expansionary policies.
Since ’08, monetary policies were doing most of the lifting with limited participation by fiscal authorities (bar China). In other words, in the absence of either private or public sectors driving higher velocity of money, it was CBs that were supplying incremental liquidity to preclude contraction of nominal GDP and avoid stronger deflationary pressures. However, marginal utility of incremental injections has been declining (witness much lower impact of recent ECB’s QE and increase in BoJ accommodation since Dec ’14).
Part of the reason for monetary stimulus fading is that supply of US$ remains low. Global economy continues to reside on a de-facto US$ standard and current incremental supply is almost non-existent (depending on definition growing at +2%/-1% clip vs. average since ‘01 of ~15%). In other words, due to lack of recovery in the US velocity of money and lack of QEs, global economy is not getting enough US$ to continue leveraging.
…as efficacy of conventional monetary QE is questioned
At the same time efficacy of continuing with conventional QE policies is being challenged and not just by independent observes but also ‘insiders’ (such as recent SF Fed paper). As velocity of money globally continues to fall, conventional QEs have to become exponentially larger, as marginal benefit declines. If public sector is not prepared to step aside, what other measures can be introduced to support nominal GDP and avoid deflation?
There are several policies that could be and probably would be considered over the next 12-18 months. If private sector lacks confidence and visibility to raise velocity of money, then (arguably) public sector could. In other words, instead of acting via bond markets and banking sector, why shouldn’t public sector bypass markets altogether and inject stimulus directly into the ‘blood stream’? Whilst it might or might not be called QE, it would have a much stronger impact and unlike the last seven years, the recovery could actually mimic a conventional business cycle and investors would soon start discussing multiplier effects and positioning in areas of greatest investment.
British Leyland failed, but it might work at least for a while
British Leyland (formed from nationalized British car companies in the late ’60s) destroyed its automotive industry but for a time it provided employment and investment. CBs directly monetizing Government spending and funding projects would do the same. Whilst ultimately it would lead to stagflation (UK, 70s) or deflation (China, today), it could provide strong initial boost to generate impression of recovery and sustainable business cycle. It could also significantly shift global terms of trade (to the benefit of commodity producers) and cause a period of underperformance by our ‘Quality & Stability’ portfolio and improve performance of ‘Anti-Quality’ screen. What is probability of the above policy shift? Low over next six months; very high over the longer term.
What's most disturbing about the above assessment is that Macquarie realizes this last ditch attempt to preserve the status quo will fail, but will - if nothing else - buy another 12-18 months.
So is that the event horizon countdown: 1-2 years... and then?
And just like last week's Daiwa report broke the seal on unprecedented economic bearishness (Citi promptly made a global recession its 2016 base case) will the Macquarie report become the benchmark which the other penguins will ape as suddenly calls to bypass the banks become the norm and suddenly every "authority" on the topic, which so vehemently advocated for QE, admits it never worked from day one, and instead recommends that the only option left to save the world is the "nuclear" one?
Which, incidentally, is precisely what we said would be the endgame on March 18, 2009 - the day the Fed announced the full-blown first QE1.
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There is simply not enough profits generated in today's economy to pay the interest on all the outstanding debt, let alone any principal payback, therefore the only options are extend and pretend, BK or helicopter droppings. And this does not even address the issue that the people who owe the debt are for the most part not the ones making the profits.
Who cares? Inflate it away. Better than killing people.
Follow the Money...
https://www.youtube.com/watch?v=n3xgjxJwedA
Helicopter-Direct Injection money.
That is money given direct to the public, and put into immediate infrastructure projects ONLY works if your economy is not one of the central golbal economic drivers. It is something that will tide you over whilst the global economy gets its act together (and the assumption that it will).
Helicopter money actually worked very well for Australia (with China's stimulus as well) and got it smoothly through the GFC up until recently.
HOWEVER the global economies didn't get their act together, didn't recover - and thus Australia 6 years later, now has to face the coming reality of the GFC.
Helicopter money is Not a strategy that can work for a Prime economy like the USA, as it is the systemic cause of the disease.
So helicopter money for the US will cause inflation, more bubbles...then end. The banks will still be happy as that money will go to individuals reducing debt.
stimulus package: what will you get?http://www.smh.com.au/articles/2009/02/04/1233423265116.html
Saving the nationhttp://www.smh.com.au/business/saving-the-nation-20090203-7wsb.html
Top kek at "the global economy". Let me tell you something, unless the members of your 'economy' have a little something called 'integrity' then they will never perform as functioning linkages. This is why this whole 'diversity' mixing bowl crap is failed from the start. Globalism only works under the premise that the developing nations will, you know, actually pay their debts. Manifestly, it is shown that the developed nations make big loans to the developing nations, and the developing nations just take the monies and run.
After failing to recreate the middle-east in its image, the west has spent the past 6 years investing its capital in the hinterlands-people that will never pay them back. Oh yeah, invest in BRICS and all their periphial states with the hope of those 10-15% returns. You'll never see any of that, because no matter how successful the projects, the people there just don't have the integrity to pay their fucking debts. You're a dirty colonialist and they've got whatever-theology excusing them.
You have to send in the missionaries and convert the foreign lands to your culture BEFORE you start investing in them. Otherwise you are just throwing your capital down a black hole.
You can TRADE with alien cultures. But you cannot INVEST in alien cultures.
I was hoping that within a year or two from now real estate prices would correct... I guess helicopter $ would prevent that or even cause further rise?
Maybe it's just me, but there sure seems to be a lot of flags being run up the flagpole this week.
And I don't see anybody saluting any of them.
This is a pictorial representation of the possible Helicopter money...
http://www.againstcronycapitalism.org/wp-content/uploads/FreeLunch-c-c.jpg
The Tylers forgot to include the link to the article. Can we have the link?
http://www.zerohedge.com/news/2015-09-18/it-begins-australias-largest-in...
I was hoping for the link to the Macquarie Bank article.
is it money or is it helicopter
chits to gamble in the casino?
Seems to me that everybody in the financial field have been blinded by too many bright ideas.
Okay, call me a conspiracy theorist but isn't Allen Greenspan, Janet Yellen, Ben Bernanke, and Larry Summers of Jewish descent?
They are 1% of the population correct? Am I am bad person for noticing this?
A govt debit card with an expiry date.
This kind of credit expansion only for the sake of financial gamblers anonymous would not be able to continue if we were dealing with the independent players but we do not.
The ownership of financial instruments is so concentrated beyond our imagination, but the proof of the fact difficult to establish due to massive legal obfuscation and obstruction.
It is the concentration of the capital that make possible seemingly unending extension of the free credit to few and practical elimination of affordable credit for the 99%, a classical cycle of expropriation and pauperization of the society that worked hard to improve their standard of living over many decades. the FED implements such precise policy.
What the FED's decision really means for the economy and viability of the FED's lies about it can be fount at:
https://contrarianopinion.wordpress.com/economy-update/
Political corruption has a shelf life. It won’t continue like this. The pattern of the end of these tyrants is being put together right now. The power to control these central banks is going to be dissipating; they’ve played their war card, their anti-Semitic card one time too often.
In my humble opinion, 95% of all financial reporting is banker propaganda. Case in point is Heather Long today on CNN Money attributing blame to the “Republican” Reagan Administration for the 20% interest rates necessitated by Carter Administration policies, and comparing it over and over to today's zero interest rates.
Yet at the same time, Greg McBride chief financial analyst at Bankrate.com in the video-related article,” Savers Are Fed Up With 0% Interest,” says savers should be happy, because they’re getting a “free ride."
While ”the average return on a savings account in the United States is a mere 0.1%, according to Bankrate.com.,” McBride tell savers that “America's biggest banks want to earn higher profits,” and should the Fed raise interest rates even a miniscule 0.25 bps, “they won't want to pass along higher savings rates to their customers right away."
CNN suggests that “while some big banks offer a stingy 0.01%,” savers should shop around: “there are online banks like Ally (ALLY) and Synchrony (SYF) that offer savings accounts with 0.85% interest or better."
"This is the only free lunch you're going to find in the investing world where you get additional return without having to take additional risk," says McBride.
The companion piece to this banker hype is Meet Janet Yellen: The most powerful woman in the world.
http://money.cnn.com/2015/09/18/investing/savings-interest-rate-federal-reserve/index.html
This all fits in with CONTRARIAN OPINION’s great rant you cite here, particularly regarding the reason behind the FED’s “para-psychological economic models,” never minding their disconnect with reality as evidenced by their “colossal 90%+ predictive failure”:
“It is not about fear, panic, exuberance, ecstasy or etc. All of that nonsense is to explain to the grunt why he was robbed blind at this cesspool of corruption as are the so-called markets run by the plunge protection teams (absent from market models, so is margin debt), protecting cronies against the orchestrated surge and plunge which MSM propaganda calls crashes but what they actually are, manifestations of capricious credit extension/contraction cycles preprogrammed by the world CBs on the orders of Wall Street plutocrats who own them.”
Good stuff, that.
Oh my, load up with PMs.
Their going to try hyperinflation.
They have debt saturation already.
Forgot about history.
Hey CB dimwit's, China tried this with their ghost cities. After the sugar high your stuck with even more excesses.
Why talk about "helicopter money" when the same thing can be acheived by cutting taxes? According to the current govt perspective on debt, why not collect zero taxes, forget the helicopters, and add all government expenses to the debt? People would say that is idiotic - how can a govt function with zero revenue? Obviously most people are too myopic to realize helicopter money with no change in current taxes or expenses will have the same end result - a massive debt that can never be paid back.
Don't you see, it is happening already and has been happening already for quite a while?
This and other articles assume that helicopter money (HM) is not yet there. This assumption is wrong. A mechanism to constantly supply HM is already firmly in place. It consists of transfer payments in many societies and of "debt forgiveness" and / or practises to prolong non-performing loans forever and to back-up the institutions that provided such loans. The amounts of HM supplied to the population through these mechanisms is very significant. The handling of student loans in the US may serve as an example. All these HM-payments are not made from any reserves but are paid for by further debt expansion and this payment against debt expansion is another important characteristic of HM.
Helocopter money, yeah, I will buy bitcoins with that.
In saner times, when demand was recognised as the driver of the economy, the US consumer was seen as the engine of the global economy.
With growing inequality, the US consumer has seen real wages stagnate since the 1970s. His consumption was maintained, first with debt, and then the illusion of wealth due to a house price bubble. He used his ever increasing house price as an ATM to borrow against to maintain consumption.
In 2008 things changed, the US consumer was maxed out on debt and his house was falling in price.
The once wealthy Western consumers have all had a similar experience.
Demand for Chinese products collapsed and China tried to keep things going with debt, hoping the West would soon be back on its feet.
With supply side economic theory being the order of the day, all the help has been put in at the top with nothing trickling down, because it doesn’t.
Capitalism trickles up though the following mechanism:
a) Those with excess capital invest it and collect interest, dividends and rent.
b) Those with insufficient capital borrow money and pay interest and rent.
With almost no welfare state in China its consumers constantly have to save for a rainy day, limiting their own consumption.
The world’s belief in supply side economics and trickle down is exactly the opposite of how Capitalism actually works, its demand driven and money trickles up.
Prepare for more solutions based on the opposite of how Capitalism actually works.
QE puts money in at the top, where it stays, blowing asset bubbles.
There is an inherent trickle up in the current system that allows the rich to take from the poor:
a) Those with excess capital invest it and collect interest, dividends and rent.
b) Those with insufficient capital borrow money and pay interest and rent.
This is the mechanism within Capitalism that looks after the idle rich.
The Duke of Westminster can inherit a vast fortune, get an investment banker to invest it wisely, live a life of luxury and leisure and leave an even greater fortune to the next generation, all thanks to Capitalism itself with no work whatsoever.
Capitalism is the benefit system of the wealthy.
To combat the massive trickle up inherent within Capitalism you need the following:
1) Those at the bottom have to be paid enough to keep the whole food chain above going.
2) There is a redistribution from the rich to the poor via taxes.
3) Helicopter money fed in at the bottom.
With none of the above currently sufficient to curb the trickle up, the system is dying through lack of demand.
The financial sector is already the 21st Century British Leyland.
Bailing out the financial sector allowed the incompetent and inefficient to survive the creative destruction of Capitalism.
It is clear that the current monetary system is (and always has been) unsustainable. When every dollar created means a dollar of debt +i interest, you only have to wait for the inevitable explosion. Taking money creation from the banks is the first step towards sanity. As for helicopter money, this is the only solution to keep the current system chugging along. The money was given to the banks who 1) supported their gambling habits with it and 2) invested in property causing property bubbles. Very little actually ended up in the real economy. Trouble is when this didn't work the first time, we kept doing it anyway, continually making things worse whilst all the time proclaiming that only by giving it to the banks could we avoid disaster - when in fact that WAS the disaster. Giving it now to the people instaed will be supporting the real economy - when people have more money, they pay off debts and they tend to spend more. This is what is needed.
There shouold not be a fear of inflation in this case because under a debt-based monetary system, debt IS the money and reduction in debt (through defaults or otherwise) means a loss of money. There has been so much reduction in debt in the real economy (people not buying on credit, or increasing their savings, businesses holding on to their cash, etc) that throwing money out of helicopters should pose little problems.
In the end we desperately need to change the fundamental system - take money creation away from the banks! Make the banks earn an honest living for a change.
Classic Bait and Click article from Zero Hedge.
One comment by one bank does not governement policy make. And besides, the last time anything like QE happened in Australia back in 2008, citizens got cheques to spend directly in the economy not banks.
This is why the immigrants. They have no history vested in the US and will easily vote for whomever writes them the check or gives them free shit. There is no doubt it's coming to US also, the economy is dead and it is the final play in bread and circus that keeps TPTB in power.
It’s done right in front of us.
Freak-boy Bush is politicking in Spanish! C’mon! Is El Chapo underwriting his campaign or what.
Desperation is the name of end game. It has started to dawn to everybody things are not working and there is no honorable exit. So let´s pretend it is business as usual. Soviet did it before.......................................
"What's most disturbing about the above assessment is that Macquarie realizes this last ditch attempt to preserve the status quo will fail, but will - if nothing else - buy another 12-18 months.
So is that the event horizon countdown: 1-2 years... and then?"
Exactly! All the Krugmans are doing is buying time. Inevitably to larger busts. Fostering inefficiencies and bloated policies.
Give the government more money and they will find ways to just waste it. Look at North Korea, it's all government. North Korea is always asking for food.
Binge-drinking get's you feeling good for a while and then you throw up and have a hangover.
Now I'm confused. Helicopter drop now and the final crash in 12-18 months? Or is it helicopter drop in 12-18 months and then crash after that?
The .001% got their helicopter drop and now they're just sitting on most of it earning interest. They've had some pretty high price inflation in the things they like to buy like expensive homes, cars, artwork, yachts, etc. Now if the 99.99% get helicopter money you can expect very high price inflation in everything else. It will feel great at first but then probably end in a Zimbabwe like disaster. Hey but fair is fair. I want my free shit too.
ADD ANOTHER ZERO, BUDDY! And, your comment is spot on!
"why shouldn’t public sector bypass markets altogether and inject stimulus directly into the ‘blood stream’?"
Given how the economy is a sea of madness, that is money which is at least more useful in creating real demand than having the same money siphoned into some 1%er offshore account.
Yeah, I agree with you. I would assume if this idea ever comes to pass, most of the "helicopter money" would be in the form of massive public works projects. But for the sake of argument, let's say all us federal taxpayers were to actually be sent checks from the U.S. Treasury, how much would it need to be for it to be worthwhile and actually stimulative?
I for one would use it to pay off any outstanding debt (car loan, mortgage, child's higher Ed. tuition costs, etc.) which of course goes right back to the big banks. I would subsequently hoard all the savings. How much would I need to be given to make me want to buy things I don't need.? Personally, it probably needs to be above $50,000 for me to start thinking about a new washer/dryer high efficiency combo.
HELICOPTER MONEY?
With their brains I would not be surprised if the money was ejected upwards straight into the helicopter's rotor.
How do we grab the helicopter cash out of the serf’s paws?
I don't like helicopter money. I prefer to be given submarine money. You know, the kind that is lost at the bottom of the lake.
"What's most disturbing about the above assessment is that Macquarie realizes this last ditch attempt to preserve the status quo will fail, but will - if nothing else - buy another 12-18 months."
But at what cost? Things are worse now, than in 2007. Math is additive.
According to Bank of America Merrill Lynch:
https://app.box.com/s/2x1jqc1901tv8v00mbqnqjfbu8rrqzzp
The HY Note
Global growth concerns spread from us to Fed
A slow moving train wreck
Today’s Fed decision was the second worst outcome for risk markets, in our view. We have written on numerous occasions that if the Fed didn’t hike rates today initially markets would rally modestly before selling off. The realization that global growth concerns are not only real, but very dangerous right now should cause a risk off environment. And with no room to cut rates, we question the Fed’s ability to manage any further slowdown through what would have to be QE4. However, we can’t see how additional quantitative easing will help, as the goals of QE have already played out: the banking system has recovered, rates are low, investors have driven debt issuance and asset prices to uncomfortable levels, and the housing market has recovered enough to not be a concern.
Furthermore, lower rates don’t help high yield at this point. Whether the 10y is at 2.20% or 2.0%, does the asset class really look all that more compelling? Not in the slightest. In fact, outside of hiking while sounding very hawkish, not hiking and sounding very dovish while expressing concern about the global economy may be the worst thing that could have happened today.
We have been saying for months that the global economy is weak and the Fed’s dovish disposition today only bolsters our view. Europe is about to enter QE2 as inflation and growth remains poor. Japan and Brazil were just downgraded. Commodities remain under pressure and we think, at some point, the narrative could turn from a supply driven story to a demand driven one. Domestically it becomes harder to argue that a strong dollar and the lack of inflation can be viewed as transitory and this headwind is continuing to hurt high yield corporates. Manufacturing is uneven, consumer spending hasn’t improved in a year, and 2014 real median income was down 6.5% versus 8 years ago (and down 7.2% from the 1999 level). Although auto sales remain strong, we would expect as much given low gas prices, an aging fleet and the fact that auto loans are one of the few places in the economy where it’s easy to obtain credit.
Additionally, high yield corporate earnings remain incredibly weak, with yoy earnings growth negative for the first time since the recession (even ex: commodities EBITDA growth is only slightly positive). Leverage is at all-time highs (again, even ex- commodities) and the High Yield index is more globally exposed than it has ever been (35% of the market generates 45% of its revenue from outside of the United States, and that doesn’t include Energy, which is globally exposed despite not realizing significant direct sales abroad).
Not only are earnings weak, but there has been next to no capex investment, debt issuance has been massive, and buybacks and dividends have driven equity valuations as CEOs and CFOs, afraid to invest in organic growth, have chosen to buy growth instead. And as a result, recovery rates are 10-15ppt below historical norms and defaults and downgrades are creeping into the market. Although we understand many will say its just commodities, is it really? What started as coal weakness 18 months ago became coal and energy weakness. But it wasn’t really just the commodity sectors, as retail was also already weak. Now it’s the commodity sectors, retail and wireline (but definitely not all of telecom). The situation almost seems unbelieveable, as everything that seems to go wrong is explained as being isolated (AMD, well, of course semiconductors are in a secular decline) and treated as a surprise (Sprint).
In our view, the makings are there for a risk off environment for some time to come. For non-commodity spreads to be 400bp tighter than in 2011 makes little sense to us. Replace Greece for a much bigger problem: China. Replace Washington dysfunction and debt downgrade with uncertainty about monetary policy and EM weakness (though we may see Washington dysfunction very soon between this fall’s budget talks and the presidential race looming). Replace US QE with European QE. Additionally, replace strong earnings growth and margin expansion in 2011 with no earnings growth, a stronger dollar, and higher leverage today. Replace decent liquidity back then with poor liquidity now. And replace the fears of a double dip recession with the potential for fears of a global recession. Though this last point has yet to play out, we think it’s only a matter of time before investors begin to feel as bearish as we do.
The Fed had an opportunity today to hike rates and begin to build a cushion should the global slowdown be so severe it can’t be ignored. Instead, they chose to wait. In our view, this has left them in a predicament as now the rumbles of never being able to increase rates will become even more exaggerated, and when they ultimately do, we think it will be more painful than if they had gone today. We expect as a consequence for there to be more market volatility, more uncertainty around the Fed’s motives and belief in the economy, and therefore more downside risk. Most importantly, however, the acknowledgment of weakness only bolsters our view that we are in the midst of the beginning of the end of this credit cycle, and we warn investors to tread carefully not try to be a hero into year end.
Now is the time that investors need to be managing risk rather than looking for alpha. 1 or 2 names will destroy the performance for what has otherwise been a good set of holdings. Remember what many have forgotten over the last 7 years, credit returns are skewed to the downside. The best case scenario is to earn coupon and the ultimate payment of principle. The worst case scenario is 40, 50, 60 or more points of loss.
We’re in the midst of watching a slow-moving train wreck, and in our view the Fed confirmed as much today.
note to self, short aus.solendra.
it's hard to time a crash.
this govt.,fed. funded Goebbelist American media is just as responsible for Americas disastrous financial situation, as it's funders.
I've been through this since 2008, ask your working-class friends how many were approached by realtors, on the street, with a portable pc trying to sell you a house, no down-payment, low monthly payments, minimal questions on your ability to make payments.
then came students telling the govt. how much money they wanted to go to college, and got it.
now car loans, I talked to a LOCAL banker friend, wanted to buy a 3,0,.00suv same as advertised every where 0% down, 0% interest, and a rebate,? payment 72 months
I asked for a 5% loan, 10% down, split the rebate, 60 monthly payments, took out his calculator, and said he couldn't get that passed.
he counter offered, sign a NON-VECHICLE collaterized loan.
he said if you don't really need, or want it, wait 2ys., there will be plenty for sale at 50% off.