‘Helicopter Money’ — The Only Solution? Boris Schlossberg | Wednesday, July 13, 2016 at 4:30 pm
The global business day starts in the Land of the Rising Sun, and these days we may also see a glimpse of our own future there.
For as long as I have been in the markets, Japan has always been the forefront of social trends in finance.
It was the first advanced economy to quickly adopt new technologies. It was the first to have created a massive real estate/stock market bubble. It was the first to face the seemingly endless challenge of deflation. And it is now the first to grapple with the demographic time bomb as its population ages while the yields on its bonds turn negative for 20 years forward.
That’s why what happened in Tokyo yesterday should be of particular interest to investors worldwide. Prime Minister Shinzo Abe, coming off his decisive win in the Japanese elections over the weekend, met with former Fed Chairman Ben Bernanke.
Bernanke is, of course, well known as “helicopter Ben” for his infamous speech in which he noted that the Federal Reserve could always resort to “dropping money from helicopters.”
Will ‘helicopter’ money save the Japanese economy? And is it a lesson for our own economy here in the U.S.?
“Helicopter money,” as it has become known, is simply the next logical step in the central banks’ attempt to reflate the economy. Instead of depositing money into bank reserves so that they can then lend it out, the central banks would simply deposit money directly into consumers’ bank accounts so that they can spend it, breaking the vicious deflationary cycle.
This may sound like anathema to regular citizens, who would view such a scheme as making money out of nothing. But in finance, money is created out of nothing every day. We simply don’t see the unseemly details of the process.
In any case, Japanese officials quickly denied that “helicopter money” was on the agenda yesterday, which inevitably means that it’s going to happen.
The fact of the matter is that after three years of effort and an untold amount of central bank stimulus, Abe is nowhere near his target of 2% inflation. The economic situation in Asia has cooled markedly as China retrenches, trying to deal with its own credit problems.
“Abe has no other option than to try ‘helicopter money’ in order to stimulate organic demand.”
In Europe, spending is at a standstill as political upheaval and the banking problems in Italy keep a lid on growth. And in the U.S., the growth trajectory remains stubbornly under 2%.
Abe, therefore, has no other option than to try “helicopter money” in order to stimulate organic demand and more importantly keep the USD/JPY pair away from the key 100.00 level that greatly hurts his country’s export sector.
For now, Japanese officials are likely to maintain the illusion that they will continue to rely on conventional policies only. But if there was ever a time and place to try “helicopter money,” Japan is it.
And if it does go down that path, expect the Fed to eventually follow its lead as the industrial world would slowly but surely turn Japanese.
Happy trading!
Boris Schlossberg
Poster Comment:
Forget the helicopter. Here in the U.S. they will need a jumbo jet to drop the money. They will need that much to keep the economy from imploding, especially after the Chinese and others dispose of their short term U.S. debt.
I think I'm turning Japanese, I really think so.