Helicopter money is just around the corner; that’s the takeaway from this week’s Global Strategy Weekly update from Société Générale’s resident perma-bear Albert Edwards.
There has been plenty of discussion on the benefits and drawbacks of potential helicopter money policies in recent months, but until this month it was widely assumed that no central bank would adopt such a policy until the next recession. However, Albert Edwards opines that after Ben Bernanke’s recent visit to the Bank of Japan on 11 July the world might be closer to helicopter policies than previously thought.
Ben Bernanke is pushing for helicopter money
It is the view of Albert Edwards that the discussion between Ben Bernanke and Bank of Japan’s Governor Kuroda focused on the topic of helicopter policies, specifically a zero-coupon perpetual bond, something that has been openly discussed in recent weeks. While this may solve some of Japan’s money problems, it’s a further step into the unknown for central banks or as Albert Edwards calls it, “the outer limits of monetary alchemy.” Edwards goes on:
“Maybe I’m getting old, or on the wrong medication, but I just can’t get my head around this brave new world where we lend the insolvent Japanese government our hard-earned money to receive nothing back from them, forever! We could just give it to them. But one thing is clear it is only a matter of time till US 10y yields converge with Swiss, Japanese and German bond yields in negative territory.” – Albert Edwards, Société Générale Global Strategy Weekly update.
On another topic, it seems Edwards believes that the US Federal Reserve will have to abandon its use of the average hourly earnings series in its policy guidance. Edwards speculates AHE series has become almost useless recently as it’s likely the indicator is underestimating the pace of wage acceleration caused by the current tightness of the US labour market. Moreover, as year-on-year CPI inflation figures rise in the coming months (the impact of the falling oil price will drop out of the calculations), wages are likely to accelerate even faster. Therefore, it’s likely Fed Chair Yellen will now have to ignore this measure she previously highlighted as important in the Fed’s thinking of when to tighten rates — another excuse for lower for longer.
And regarding China, Edwards picks out two alarming figures that highlight the precarious state of the country’s economy. China’s fixed-asset investment slowed to 7.4% last month, but the most concerning aspect was the continuing deterioration in private sector investment where growth turned negative for the first time since 2004.
Private sector investment declined to -0.7% for the first time since 2004 last month, standing in stark contrast to state-owned investment which strengthened to 24%. Infrastructure investment was the only major sector that saw strengthening with growth up to 21.2% from 20.5%. Manufacturing investment growth turned negative again to -0.3% and property investment slowed further to 3.6%.
Definitely a trend to watch going forward.