‘Helicopter money’ is coming to America
SEVERAL years of rock-bottom interest rates around the world haven’t been all bad. They’ve helped reduce government borrowing costs, for sure. Central banks also send back to their governments most of the interest received on assets purchased through quantitative-easing programmes. Governments essentially are paying interest to themselves.
Since the beginning of their quantitative-easing activities, the Federal Reserve has returned $596 billion to the US Treasury and the Bank of England has given back $47bn. This cosy relationship between central banks and their governments resembles “helicopter money”, the unconventional form of stimulus that some central banks may be considering as a way to spur economic growth.
I’m looking for more such helicopter money — fiscal stimulus applied directly to the US economy and financed by the Fed — no matter who wins the presidential election in November.
It’s called helicopter money because of the illusion of dumping currency from the sky to people who will rapidly spend it, thereby creating demand, jobs and economic growth. Central banks can raise and lower interest rates and buy and sell securities, but that’s it. They can thereby make credit cheap and readily available, yet they can’t force banks to lend and consumers and businesses to borrow, spend and invest. That undermines the effectiveness of QE; as the proverb says, you can lead a horse to water, but you can’t make it drink.
Furthermore, developed-country central banks purchase government securities on open markets, not from governments directly. You might ask: “What’s the difference between the Treasury issuing debt in the market and the Fed buying it, versus the Fed buying securities directly from the Treasury?” The difference is that the open market determines the prices of Treasuries, not the government or the central bank. The market intervenes between the two, which keeps the government from shoving huge quantities of debt directly onto the central bank without a market-intervening test. This enforces central bank discipline and maintains credibility.
In contrast, direct sales to central banks have been the normal course of government finance in places like Zimbabwe and Argentina. It often leads to hyperinflation and financial disaster. (I keep a 100-trillion Zimbabwe dollar bank note, issued in 2008, which was worth only a few US cents as inflation rates there accelerated to the hundreds-of-million-percent level. Now it sells for several US dollars as a collector’s item, after the long-entrenched and corrupt Zimbabwean government switched to US dollars and stopped issuing its own currency.)
Argentina was excluded from borrowing abroad after defaulting in 2001. Little domestic funding was available and the Argentine government was unwilling to reduce spending to cut the deficit. So it turned to the central bank, which printed 4bn pesos in 2007 (then worth about $1.3bn). That increased to 159bn pesos in 2015, equal to 3pc of gross domestic product. Not surprisingly, inflation skyrocketed to about 25pc last year, up from 6pc in 2009.
To be sure, the independence of most central banks from their governments is rarely clear cut. It’s become the norm in peacetime, but not during times of war, when government spending shoots up and the resulting debt requires considerable central-bank assistance. That was certainly true during World War II, when the US money supply increased by 25pc a year. The Federal Reserve was the handmaiden of the US government in financing spending that far exceeded revenue.
Today, developed countries are engaged not in shooting wars but wars against chronically slow economic growth. So the belief in close coordination between governments and central banks in spurring economic activity is back in vogue — thus helicopter money.
All of the QE activity over the past several years by the Fed, the Bank of England, the European Central Bank, the Bank of Japan and others has failed to significantly revive economic growth. US economic growth in this recovery has been the weakest of any post-war recovery. Growth in Japan has been minimal, and economies in the UK and the euro area remain under pressure.
The UK’s exit from the European Union may well lead to a recession in Britain and the EU as slow growth turns negative. A downturn could spread globally if financial disruptions are severe. This would no doubt ensure a drop in crude oil prices to the $10 to $20 a barrel level that I forecast in February 2015. This, too, would generate considerable financial distress, given the highly leveraged condition of the energy sector.
Both US political parties seem to agree that funding for infrastructure projects is needed, given the poor state of American highways, ports, bridges and the like. And a boost in defence spending may also be in the works, especially if Republicans retain control of Congress and win the White House.
Given the “mad as hell” attitude of many voters in Europe and the US, on the left and the right, don’t be surprised to see a new round of fiscal stimulus financed by helicopter money, whether Donald Trump or Hillary Clinton is the next president.
Major central bank helicopter money is a fact of life in war time — and that includes the current global war on slower growth. Conventional monetary policy is impotent and voters in Europe and North America are screaming for government stimulus. I just hope it doesn’t set a precedent and continue after rapid growth resumes — otherwise, the fragile independence of major central banks could go the way of those in banana republics.