Just over a month ago, Deutsche Bank's chief economist David Folkerts-Landau, unleashed an epic rant against the ECB, warning of social unrest and another great depression unless the ECB changes its ways. Some thought that DB was genuinely concerned about central planning, and was urging the ECB to stop all intervention altogether, but that naive read was quickly stomped out just one week ago when it emerged that the Deutsche Bank economist was merely acting out of purely selfish reasons when he called for a €150 billion bailout of Europe's banks, with the unspoken demand that Deutsche Bank should be on the very top.
Finally, any doubt was squashed this weekend, when DB's macro strategist Alan Ruskin issued a positively glowing review of Helicopter Money, barely stopping short of demanding it be unleashed immediately. To wit:
Because Helicopter money is less directed at using currency weakness as a core transmission mechanism than QE or particularly negative rates, Helicopter money should be more, rather than less acceptable to an international community worried about currency wars
What was less emphasized is that unlike NIRP, "helicopter money", if it works, pushes the long end of the yield curve higher ahead (after all the endgame is soaring, if not hyper, inflation), something the global banking sector cripped by trillions in debt,desperately needs, and thus is precisely what Deutsce Bank needs, whose stock continues to trade just barely off all time lows.
As such, any delusions that DB was raging against failed monetary policy in general can be forgotten. All DB wanted was monetary policy that benefits, drumroll, Deutsche Bank... as the following amusing DB table "ranking" various monetary approaches shows. Needless to say, DB really likes helicopter money.
So, for those who care, here is Deutsche Bank's evelator pitch for why helicopter money should be next:
- We have evolved to the point where familiarity with QE breeds acceptance, while unfamiliar ‘helicopter money’ policy, unfairly breeds contempt.
- Compared with the scale of QE liquidity dropped into financial institutions, piling up in the form of excess reserves, the exante and expost calibration of Helicopter money can be considered almost surgical. Helicopter money legacy issues are miniscule compared with the QE overhang of liquidity in the system, and a costly and bloated Central bank balance sheet, which is so difficult to reverse.
- QE forces a substitution into riskier assets, which is another way of saying it inflates and distorts the price of risky and less risky assets, with implications for all balance sheets, and inter-temporal economic decisions. Helicopter money is less likely to distort every asset price in the economy, when compared with deliberate financial repressive policies like QE and negative rates.
- One of the big criticisms of helicopter money is that it is open to political abuse and that the coordination of fiscal and monetary policy, threatens Central Bank independence. This is less of a worry if there is a clear institutional framework whereby the Central Bank has the final say on whether to participate in any helicopter scheme or not, and they can ‘right size’ the stimulus.
- If one has to be cautious about Helicopter money it is less about whether it can be successful, and more about how in these times of excessive demand management, any effective tool is apt to be used to the point of abuse.
- Helicopter policy that successfully supports growth (with contemporaneous rightward shifts of the IS and LM curve) inclusive of favorable multiplier effects, will likely temporarily drive nominal interest rates higher, and the question for real interest rates (that with nominal rates is a key FX driver) is whether inflation expectations rise more rapidly than nominal rates.
- Carefully calibrated and contained Helicopter actions, by an independent and historically credible Central Bank (not an oxymoron), would likely have a contained impact on inflation expectations. This is especially true, if Helicopter money is pursued in emergency deflationary circumstances. As such, any initial kneejerk selling of a currency when a G10 country pursues a measured Helicopter solution that is befitting of its large disinflationary output gap, is likely to be a medium-term buy the currency dip opportunity.
- Because Helicopter money is less directed at using currency weakness as a core transmission mechanism than QE or particularly negative rates, Helicopter money should be more, rather than less acceptable to an international community worried about currency wars.
Some more details:
Compare the graphic moniker ‘helicopter money’ with the liquidity creation known as “QE’. ‘Helicopter money’ evokes pictures of a 100 trillion Zimbabwean dollar note that once bought two loaves of bread. ‘QE’ in contrast is an austere word, well-suited to the economics of Scrabble, depicting familiar unorthodox policies, and surely something infinitely more responsible? Wrong. In our opinion, QE represents poorly calibrated liquidity dropped into financial institutions, piling up in the form of excess reserves, while the calibration of Helicopter money can be almost surgical in comparison.
One of the biggest differences between QE and ‘Helicopter money’ is that QE is not overtly coordinated with fiscal stimulus - even if it may have a covert fiscal objective. Japan QE is a good example of this, buying close to 16% of GDP per annum in QE related assets. The BOJ has accumulated assets of more than 50% of GDP which largely covers the total expansion in General Government debt over this period. A possible conversion of Central Bank holdings of debt to zero coupon perpetuals is one example of the market discourse on how monetary policy QE can ultimately help debt management. Securing fiscal sustainability through public sector debt ‘write-offs’, is a job for which QE is better equipped than helicopter money, where the fears on the latter are centered on ‘inflating debt’ away.
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Helicopter policies are not advocated in ‘a normal world’. They are however almost inevitable in the next recession, if this is indeed a world of where secular stagnation with unusually low equilibrium real interest rates are prevalent. The good news is that these policies have been given ‘a bad rap’. You may have heard the joke about the helicopter money dropped on country A where recipients saved it, country B that spent it, and country C where the citizens simply returned the money to the police. The point being that the impact of helicopter money cannot be perfectly calibrated, but it is almost surgical when compared with the scatter shot impact of the unorthodox policies currently pursued.
We have evolved to the point where familiarity with QE breeds acceptance, while unfamiliar helicopter money unfairly breeds contempt. If one has to be cautious about Helicopter money it is less about whether it can be successful, and more about how in times of desperate/excessive demand management an effective policy tool is apt to be used to the point of abuse
But most of all whether it can bail out Deutsche Bank. Thanks Alan, we get it.
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Finally, here is One River's CIO, Eric Peters, with an anecdote why Helicopter Money - and its associated big inflation - is coming, but why a major crisis will be needed first.
Anecdote: “Has Brexit created the political Lehman moment?” asked the CIO on the outskirts of the Eurozone. We were discussing whether Britain’s populist revolt is the catalyst for a global fiscal stimulus, or if this latest risk-asset rally in anticipation of more stimulus is another bounce to fade.
“Has Brexit absolved markets of the need to fall sharply?” he continued. You see, the way this usually works is that economic weakness provokes a deep market decline that sparks public panic. Protest. And under the cover of crisis, policy makers ease aggressively, reform.
So in normal circumstances, at 1,700 in the S&P 500 you’d expect stimulus. And at 2,150 you’d expect nothing. But we no longer live in normal circumstances.
“For fiscal stimulus to be big enough, it must come from Japan and Europe, China too.” A 10trln Yen stimulus seems pretty well discounted. Yamamoto has pushed for a 3-year 30trln Yen package. Satoshi Fujii has pushed for 37trln Yen. “Will they pull out the bazooka? That’s hard without the explicit use of helicopter money, which remains off limits for now. But they’ll do enough to make this work.”
Of course, Europe is another story. Germany must let their southern neighbors cheat on deficits and bank recapitalizations. “Spanish election showed if you let them cheat and growth surprises positively then extremists don’t do so well. Europe can only survive as an inflation zone. Will it be formally tolerated? Probably not. Will governments cheat anyway with ECB support?” Probably.
“So Japan will be the flag bearer of fiscal stimulus.” Which will be sufficient to breath some inflationary spirit into the system. “But this is all febrile and can get over-turned by the slightest change in wind direction,” he said, tentative.
“This will be the little inflation before the big helicopter-driven inflation.”
But that will first require a crisis.
We agree, and look forward to just what this massive crisis is that unleashes the final episode of monetary lunacy.