The Path To Inflation: "Helicopter Money"

Tyler Durden's picture

Authored by Charles Hugh Smith via OfTwoMinds blog,

The general view in inflation is dead, essentially forever. Maybe. Maybe not.

We all know real-world inflation for big-ticket expenses is far above the official rate of around 2% annually.

Yet conventional economists are virtually unanimous that deflation is the danger and inflation is a "good thing" we need to spur so servicing existing debt becomes easier for debtors.

Due to the deflationary pressures of technology and stagnant wages for the bottom 90%, the consensus sees low inflation as far as the eye can see.

When the consensus is near-100% on one side of the boat, we can safely bet Reality will not conform to expectations. This leads to a question: what could cause official near-zero inflation to surprise the consensus and leap higher?

One possible answer is "helicopter money": money created by central banks that is distributed directly to households via tax rebates, debt forgiveness, or Universal Basic Income (UBI).

For the past 17 years, central banks have funneled credit and liquidity into the banks at the top of the wealth-power pyramid. Very little of this new "wealth" has trickled down to the bottom 90% of households in the real economy who have seen their earnings stagnate and their costs rise.

Now that debt and essentials are absorbing much of the bottom 90%'s earnings, there's little fuel left for additional debt-based consumption. This is why we see auto sales plummeting.

The only way the central banks/states can fuel more debt and spending is to drop "helicopter money" directly into the consumers' checking accounts.

Once they do this, the "new money" goes directly into the real economy. This is quite different than the past 17 years of monetary stimulus that went mostly into assets owned by the wealthy.

There's another driver of inflation: shortages of essential commodities. I define inflation very simply: a loss of purchasing power, which means we are paying more money for the exact same good or service.

If it took an hour of labor to buy X, and now it takes 2 hours of labor to buy X, that's a loss of purchasing power, i.e. inflation. This can be a monetary dynamic, i.e. a devaluation of a currency, but it's not restricted to monetary functions.

The world has been awash in cheap commodities for 20+ years. Other than the brief spike in oil in 2008, commodities have been relatively cheap and abundant. Grains have plumbed historic lows, for example.

The two are connected, of course; low energy costs reduce the costs of production of commodities.

But we've collectively forgotten that shortages can occur due to "perfect storms" of extended bad weather and political crises. At some point, humanity's luck will run out and key commodities will soar in price due to shortages.

These shortages could push prices much higher very quickly.

You see the conundrum facing central banks. very little of the trillions in new credit they created ended up in the hands of households. All the new money did was inflate asset bubbles in assets owned largely by the wealthy.

With earnings stagnate for years/decades, households have run out of rope to fund new purchases. Once the bottom 95% can no longer afford to borrow and spend more, the economy sinks into a self-reinforcing recession.

Creating more free money for financiers as central banks have done for 17 years won't solve this recession. Instead, it will anger the bottom 95% to see the wealthy's assets climbing ever higher. That anger translates into political discord.

But "helicopter money" has its own risks. To fund "helicopter money," governments will have to borrow trillions more from central banks. If this flood of new money pushes inflation higher, the interest rates governments will pay on future "helicopter money" will rise, squeezing all state spending as interest payments eat up more and more of the government's tax revenues. Eventually most of the tax revenues goes to paying interest, forcing the government to borrow trillions more just to maintain funding, which pushes interest higher, and so on.

The general view in inflation is dead, essentially forever. Maybe. Maybe not.

Bottom line: the next recession won't be "fixed" with the central bank playbook of more free money for financiers.

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Handful of Dust's picture

Plz add health insurance to the chart. Or is that "health care?"

takeaction's picture

Inflation is EVERYWHERE...except for where I put my money...Metals.  I listened to all of the metal pushers...got fucked.  And NO I am not waiting another decade.

To the moon....Yeah right....

Check back with me here in another 8-10 years...let's see who was right...

You buy more metals that earn you ZERO.

I will buy and buy and buy more rentals that allow you to adjust your tax rate to ZERO from right offs...depreciation...mortgage interest...repairs...and the rental cash flow...let alone the increase in VALUE over time.

You do yours...I will do mine...

 

Dutti's picture

Smart strategy, takeaction! Watch out for the taxman when he realizes that you make good money - gameposts can be changed.

Spending some time in the US recently made me wonder how so many different clothing businesses in an upscale mall could make money. At the time there were just not many customers roaming all these different outlets.

Helicopter money for the average consumer would help a lot, so I would not be surprised to see it happen when times get tougher.

rejected's picture

Note to Tyler...

You really need to save this post. Might prove interesting,,, might not.

takeaction:  I don't remember anyone on this site 'telling' folks they would make mucho fiat off of gold. Most here have the metal as insurance and don't care what the price is. At least I don't. The gold/silver market is completely controlled. They'll allow it to run up a little (like now) then they'll crash it and take profits. Been watching this for many years.

Like you say: You do yours... I'll do mine...

shizzledizzle's picture

I somewhat agree with him. I have some PM as a reserve only but really feel that rural land in my area is probably the best place to park my money right now to protect it from inflation. 

bobdobolina's picture

Where are you getting the numbers for inflation? You can track it daily here and see that it is pretty radical and all over the place.

Overleveraged_and_Impatient's picture

Inflation is a killer. It will send the S&P 500 to 10,000 by 2025. The time is now to go all in with 3x Leverage and make money. Do not be caught with money on the sidelines when inflation strikes.

 

Why bet against $200+ Billion Per Month in stock market inflows via the Central Banks of the world in coordination with the President's Working Group on Financial markets?

 

There will be no crash and no more deflation. The water is warmer than ever and Trump has your back! Do you REALLY think he's going to allow the stock market to crash on his watch? No! He already said he likes lower rates and Yellen.

 

Trump will go down in history as the ultimate Stock Market president, outshining even Obama.

chunga's picture

Inflation is "dead forever" while everything I buy costs moar. Got it.

Conjuring money from thin air and giving it to big banks and wall street barbarians is pretty bad, but conjuring money to give to the sheeple is worse. Got it.

Some things are moral hazardy than others, I suppose.

rf80412's picture

Conjuring money from thin air and giving it to big banks and wall street barbarians is pretty bad, but conjuring money to give to the sheeple is worse. Got it.

Stimulating the economy by generating demand for goods and services with everything from massive infrastructure projects to getting arts and humanities grads out of Starbucks and doing what they're trained to do - the New Deal did that too - would've been the least bad way for the government to inject liquidity.

Even when I was still a lefty, I could see the writing on the wall that the goal was merely to reinflate the bubble(s): the people and the real economy be damned.

MEFOBILLS's picture

Below is a link to Canada's sovereign money system 1938 to 1974:

http://qualicuminstitute.ca/wp-content/uploads/2011/12/fedebt1.png

Note the debt starts to increase after 1974, when Canda converted to a debt spreading "Fed" system like the U.S.?

From 1938 to 1974, Bank of Canada was a Crown Bank, where all the stocks were owned by MOF, Ministry of Finance.  MOF would direct BOC to spend DEBT FREE into the economy.

Debt Free is exogneous money, created outside of the private banking system, and without a concurrent debt instrument.  Canada DID NOT HAVE HIGH INFLATION during this period.

When there is unemployment, lax demand, AND PRIVATE DEBT strangling the economy, then exogenous money is the right medicine.  The U.S. also got out of its debt problem in WW2 by spending exogenous money, originating as line items on the budget, but not financed with taxes.

The author makes this hypnotic statement:

 

"But "helicopter money" has its own risks. To fund "helicopter money," governments will have to borrow trillions more from central banks. If this flood of new money pushes inflation higher, the interest rates governments will pay on future "helicopter money" will rise, squeezing all state spending as interest payments eat up more and more of the government's tax revenues"

Who says governments have to borrow from privately held Central Banks?  That is Jew Talk.  That is pure hypnosis... you have been punked.  History does not support this contention.

Money CAN be created exogenously without a debt instrument.  If it then channels into productivity modes, and then becomes wages, it is a virtuous cycle.  Debt free is then taken up in taxes.  Pay attention to the rules:  It must be channeled into productivity modes, then uptaken in taxes.  Taxes on rentiers is ideal.

Hitlers Germany, from 1933 to 1938 issued debt free money in the form of MEFOBILLS.  England used Bradburry Pounds.  Australia spent directly from their State Bank.  Canada spent debt free from their State Bank.  Germany's tax roles almost trippled by 1938, and there was no great depression.

Economic and monetary history is purposefully not taught in College.  Wonder why?  Go to college, and be turned into a vegetable.  Then write pieces for ZH, and pass on hypnotic false teachings.

perkunas's picture

The bank of Canada is still owned by the people, and its not privite like the fed. Unfortunatly its not run that way, and is owned by us, only on paper. Its time to take it back

AnimalSpirits's picture

Hello Mr. Bills :-)

I watched Princes of the Yen and Richard Werner is excellent. The purpose was to control political, social and economic levels. The likes of Toshihico Fokui of BOJ are criminals. A journalist asked him when he planned to end the easy money policy and his response was so ridiculous, and arrogant, I had to write it:

“Because the consistent policy of monetary easing continues, quantity control of bank loans would imply a self-contradiction. Therefore we do not intend to implement quantitative tightening. With structural adjustment of the economy going on for quite a long period, the international imbalances are being addressed. The monetary policy supports this, thus we have the responsibility to continue the monetary policy as long as possible. Therefore it is natural for bank loans to expand.”

Like you said, it's all about bubbles - even 1929 was a bubble - so for almost 100 years now, after many other bubbles, they are still dealing us the same strategy. It is exremely frustrating...where are all our academics, the learned economists - they should be screaming this to the public. This should be in every high school. I teach my students about this and they can't believe it! (It's not in my curriculum, but I teach it anyway :-)

According to Paul Hellyer, the Bank of Canada Act has not changed since 1934 - it's just the government choosing the borrow from private banks - the gov could choose to use BOC tomorrow. There is the BIS issue, though...and I've read that CETA is an issue as BOC use could be challenged, given the ISDS (inter-state dispute settlement)

 

Another interesting character fignting the good fight - Paul Hellyer:  https://en.wikipedia.org/wiki/Paul_Hellyer

http://www.canadianbankreformers.ca/bank-of-canada/

Rocco Galati and the lawsuit against the Bank of Canada

https://www.youtube.com/watch?v=4ZuIKXXtQN0

 

Again, many thanks for your valuable comments and links. 

gold rubeberg's picture

Correctomundo ... true helicopter money does not involve debt creation.

Creative_Destruct's picture

MEFO,

Money CAN be created exogenously without a debt instrument.  If it then channels into productivity modes, and then becomes wages, it is a virtuous cycle.  Debt free is then taken up in taxes.  Pay attention to the rules:  It must be channeled into productivity modes, then uptaken in taxes.  Taxes on rentiers is ideal.

"MEFO had no actual existence or operations and was solely a balance sheet entity. The bills were mainly issued as payment to armaments manufacturers. 

Schacht has later said that the device "enabled the Reichsbank to lend by a subterfuge to the Government what it normally or legally could not do".[1]"  https://en.wikipedia.org/wiki/Mefo_bills

Interesting. I presume one productivity channel would be infrastructure spending. This would be channeling printed dollars directly into such projects. But I have a question. How does one, in the US economic system, assure that such printed, unborrowed money is channeled into "productivity modes" and not into boondoggles and winner-picking fiascoes? And how does one do this publicly (not in secret money pumping like the MEFO Bills system did) without damaging the confidence of the markets and confidence in the currency? 

While it is true that in 30's Germany a virtuous cycle of employment was created by this and in businesses in society at large,  Hitler and Schnact had an autocratic system where it was possible for the MEFO money to be  channeled secretely into the system, which  was designed to flow ultimately into German rearmament, avoiding the restrictions imposed by Versailles.  Beyond avoiding Versailles, the secrecy had the advantage of maintaining the official interest rate cap at 4.5% thus maintaining the confidence of the bond markets. It also kept the populous, the Reichstag, and the rest of the financial system in the dark.We have no such central dictatorship that could secretly funnel money through the system (at least not that I am aware of!), and the political and financial visibility of this process could be perceived as a fraud with resulting loss of confidence in the system, markets and the dollar.

In short, the question I believe is, would this work without the secrecy? Or would it (finally) awaken the "bond market vigilantes" and/or destroy confidence in the currency if done in the light of day?

Genuinely interested in your thoughts on this. Enlighten me if I've got something wrong.

adanata's picture

Of course the joke is the government cannot borrow "money" from central banks because they don't lend "money"; just worthless digits they puke all over us. I know! ...let's take the fake $, buy real shit with it, then repudiate the debt. MFs.

2_legs_bahhhhhd's picture

"The world has been awash in cheap commodities for 20+ years. Other than the brief spike in oil in 2008"

Really? Brief spike? Oil has been more expensive than it is right now for 11 years running between 2005-2016, but now we have no inflation....total bullshit. Gasoline is almost the same price as when oil was double, the cost of real food never goes down., insurance, taxes, fees, licences thru the roof. The disinformation is getting so thick, that soon people will demand more inflation.

chunga's picture

It drives me crazy. The experts used to tell us whenever oil goes up, of course everything else goes up because it's all tied together.

Well guess what...when oil goes DOWN everything else STILL goes up. 

2_legs_bahhhhhd's picture

Loud and clear, it's so obvious Ray Charles could see it. Maybe I'm losing it but at one time I thought CHS made sense to me.

hoist the bs flag's picture

stop complaining and eat ramen like the rest of us plebs. it's hedonically adjusted in place of grandma's cat food

Fundies's picture

Chinook or $kycrane ?

asteroids's picture

Central bankers have spent decades trying to print their way out of one crisis or another. It doesn't work. But, they are too stupid/greedy to do the right thing.

Pft's picture

It does work. The rich are the biggest beneficiaries of all busts. While they take a short term paper loss they can write much of that off against future tax liabilities . They have the cash to buy low assets they then inflate, not to mention the collateral they seize on from those who default on loans. The business cycle they create is a money pump from the bottom 95% to the top 0.1%

WorkingClassMan's picture

Fuck the financiers.  I want my Ben "Shalom" Bernanke heli-money!  With it, I'll pay off my long-standing schmuel loan and invest the rest in silver and for my emergency fund of liquid cash.

Sudden Debt's picture

If they do, the poor will be destroyed.

If everybody gets cheap money, not free money.

Cheap money will be interest free loans for everybody.

Inflation will kick in bigtime as most will spend it in a very short time.

Most of that money will leave the country as they'll be producing the stuff 

and the poor will be left with more debt, massive inflation and a crippled wellfare system that won't inflate with the dollar.

And those idiots will first dream of the heavens gifts that will turn poison very fast.

Everybody gets what he deserves...

 

and as with Alladin's lamp... be carefull what you wish for...

there's more downside then pleasure to that "gift"

83_vf_1100_c's picture

Helicopter money for the people? Sure, why not. I'll watch my neighbors blow theirs on more debt in the form of new cars. I will spend mine on materials for a big storage shed for the farm stuff, tractor i.plements hay etc. Any left over goes to AU, AG.

Maybe with all those new truck buys I'll be able to get that deal on the neighbor's old 3/4 ton.

 

marcel tjoeng's picture

 

article written by a dumb idiot
“governments will have to borrow trillions more from central banks”

no they don’t

the Government or rather, US Congress, can print as much money as its wants and needs.

Research modern monetary theory MMT and know you’re being held hostage:

The modern state post Bretton Woods that issues and uses a floating currency, cannot go bankrupt, even though this given is never mentioned by any budget committee, nor the BOE, nor the economic and finance ministry, neither by orthodox monetarists at the IMF, the ECB, the FED and the likes.

For a number of more reasons, this means that the modern state, especially the organized Western countries and the ECB, because these nations cannot go bankrupt, this also means the government budget deficit is not an actual problem,

on the contrary, under the present conditions of monetary and economic contraction, spending cuts and budget surpluses are detrimental to the economies concerned.

When the Government spends it merely adds to the common wealth, the limits being basic full employment.

Research modern monetary theory MMT, Warren Mosler hedgefund manager, and the economics professors at University of Missouri-Kansas City (e.g. professor Stephanie Kelton). The MMT theory integrity is endorsed by for instance professor James K. Galbraith, distinguished post-Keynesian economist.

The 7 Deadly Innocent Frauds
moslereconomics.com/wp-content/powerpoints/7DIF.pdf

Fact #1.
.. In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.

 

rejected's picture

So, govment could print up a 500 trillion dollar note, pay off all debts, fund everything else and have a 200 trillion dollar surplus! 

That's cool! We're in the money!  (1933 in the depression)

https://www.youtube.com/watch?v=UJOjTNuuEVw

2_legs_bahhhhhd's picture

Don't kid yourself, every D0llar of debt has been securitized with collateral, property that once belonged to the beneficiaries of the trust. The end comes when they can no longer pay the interest, or run out of collateral to pledge. It's just business...hah

TeethVillage88s's picture

Required:

Moratorium on Privatization of National Assets in environment of LIRP/ZIRP/NIRP, QE, Stock Buy Backs, LBO or Acquisitions... Rape of Real Estate crashed from 2008, Rape of Agriculture crashed from 2008, Commodities Crashed from 2008, ... hm... wow Non-GAAP Earnings in play?

Moratorium on Capital Expenditures on Stock Buy Backs, Privatization of Assets/National Assets.

Moratorium on Mal-Investment?

rejected's picture

A brand new 1996 Chevy Truck averaged $18,000.

A brand new 2016 Chevy Truck averages $28,000

According to Charlies Chart there has been no price change.

Am I overlooking something?

TimeIsTheFire's picture

Yes you are overlooking something. There's a so-called "quality adjustment factor". It works like this: That new truck that sells for $28k has all the bells and whistles, a better aircon, radio, etc. What is done to measure "inflation" is to hypothetically remove all those and then declare the truck worth $18k. Ergo, no price change.

CRM114's picture

Which is bollocks, because one no longer has the option of buying a truck without said bells and whistles, even though many, like myself, would rather have one.

TimeIsTheFire's picture

Of course it's total bollocks. In fact, it's outright fraudulent to "measure" inflation in that way.

King of Ruperts Land's picture

The Chart is inflation adjusted and whoever added the "inflation 55%" line at 55% screwed up the chart. Following the zero line means going up 55%, like your truck example did.

oDumbo's picture

Odumbo's printing of trillions of dollars for the banks to lend has been the biggest theft of capital from the American people ever ventured in this country's history.  Rich bankers lent it to each other, propped up stock prices, bought more houses, funded PE firms to buy blocks of assets.  This has been the biggest FU of corrupt government elitism and favoritism to date.  How does it end?  Badly, of course.  I own no gold, but I'm thinking about it for the first time.

hoist the bs flag's picture

late to the punch bowl? it's okay. get into silver if gold is pricing you out.

dark pools of soros's picture

yes send us all the helicopter cash they want...  as long as we all get the same cut

 

OCnStiggs's picture

What could possibly go wrong?

rickv404's picture

Odd that AEI sponsors that chart. I would think they'd be all for inflation, considering their predilection for big government.

yogibear's picture

Good idea. Trump's gonna throw a Molotov cocktail at the  liberal 12 member Federal Reserve board.

 

https://ibankcoin.com/flyblog/2017/06/05/trump-set-shake-fed-nominate-co...

 

A significant shakeup at the Federal Reserve is coming, as Trump is set to nominate Carnegie Mellon University professor Marvin Goodfriend and former Treasury Department staffer Randal Quarles to fill the vacated seats on the board Fed of Governor’s

Trump is set to nominate Robert Jones chair, CEO of Old National Bank, Carnegie Mellon University professor Marvin Goodfriend and former Treasury Department staffer Randal Quarles to fill the three open seats on the Federal Reserve’s Board of Governors.

Both Goodfriend and Quarles are considered to be politically conservative and will serve as a poison pill for the ultra-left leaning Yellen. They’ve both been highly critical of the Fed’s approach to fiscal stimulus, dealing with the financial crisis, and may pave the way for Yellen’s eventual departure

gcjohns1971's picture

All currencies today are based on debt.

There is no collateral at all.   There is only the expectation of a future interest payment.

If there's no inflation today, then there can be no interest payment tomorrow.

That's why they want inflation.

A Ponzi-scheme must have an ever-widening base.

The problem is that you can no more pay for basic commodities with such pure fiat than you can pay with wishes.

You must pay with other production equal to the inputs needed to get the commodities.   It is the numerator, not the fiat denominator, that matters.

What you CAN do with pure fiat currencies is steal.  Doing so disincentivizes real production.   And eventually the numerator in the fiat equasion shrinks so much that it cannot sustain its own debasement...ergo confidence.   When people catch on then they will desire almost anything else, which results in the price of almost everything rising.

All transactions require two parties.   Mass inflation happens when the currency table is tilted away from the producers of real products to the point that their pay cannot pay for the products they produce, and hence have no means to continue producing.

Shortly, for one person to get something for nothing, another must get nothing for something.

People who get nothing for something stop making something.

Money cannot buy something which is not made.

Money that can pay for little and less, is worth little and less.

An economy cannot steal its way to prosperity.

conraddobler's picture

That is it in a nutshell.

If every day at 2 pm a thief shows up, knocks you on your head and takes everthing you've done for the day it won't take long before you wise up and first you stop making anything.

You'd probably do other things if you could but they see to it you really can't.

They can force you to produce though it's called slavery.

They'll try it of course, they always do.

However down that road productivity goes to near zero.

No one cares, you have to threaten them with death to get them to work, then they stop caring and die etc.

That is the future that lies ahead there is no other possible future.

People need to wake up and realize where this is going.

hoist the bs flag's picture

so what you are saying is capitalism is dying... or does it need some funny prefix like "crony" or "oligarchy"?

CRM114's picture

Good summary, but might I add a small correction?

People who get nothing for something stop making that something for others, and start making that something and other things for themselves, i.e. Going Galt.

However, in general, you aren't going to hear about that, because the last thing any of us want is anyone from Government knowing about it.

King of Ruperts Land's picture

Helicopter money for the people is still just to bail out the banks who are about to become insolvent when consumers start defaulting on the over indebtedness that the banks lent them.

This will just prolong the march to slavery. Better to let the bankruptcies roll along with a deregulating and job creating environment so the economy will be back in the hands of the productive/working sector rather than the financial/government sector.

It would be a great time to bring back gold and silver money. It would be great to have some silver left over in our pockets at the end of the work day.

High asset prices don't do dick all for the real economy. Let's pop the bubbles and have some deflation. Bankruptcies are the solution!

Nothing is too big, and no one is too small to LIQUIDATE!

Blankfuck's picture

We the people of the USA, who didnt get this printed ponzi money,  need to hand out the awards to the looked up to Ponzi clan!. The FED RESERVE FUCKER DAY is coming up where these ponzi artists will be deciding on interest rates again. Well as an award Im going to shit in a pie tin as an offering of wisdom. See these FED FUCKERS  deserve to eat everyones shit, just like they dished out to the people who didnt get this ponzi money. The bankers should get a piece of this pie as well since these ponzi pimps got the money and lent it out to the little people. Now that home prices are over inflated and stocks, make sure you send off your gifts in a tin and let them indulge our free offering as well. Send a bonus dish to Goldman Sachs as well! This is where this collusion clan were bred.  They well deserve our plentiful deight and make sure you give them as much as you can! You can look up those addresses, its free!

VWAndy's picture

 There aint that many trees. Exponents are a bitch.

  PS I hate crackheads!

Pft's picture

Governments dont have to borrow the Helicopter Money, they can create their own money and make it legal tender. A nation with the natural resources , infrastructure, military , technology , etc has enormous credit in which to use to print whatever money is needed for the economy without need of central banks who charge interest for it and operate more or less independently

Why is it only commercial banks who own the Fed that can create money without borrowing it? Every loan made creates money out of thin air and pays the banks interest.

This antiquated banking system that began with the BOE in the end of the 17th century needs to be scrapped