Free Money – This Incredibly Reckless Policy Is Gaining Momentum by Hard Assets Alliance
I was sure I misread the title, because everyone instinctively knows this policy is a bad idea… right?
But I didn’t misread it. And it was far from the only article in support of it.
Charlie Munger: Invert And Use “Disconfirming Evidence”
Charlie Munger is considered to be one of the best investors and thinkers alive today. His thoughts and statements on investment research, investment psychology, and general rational behavior are often incredibly insightful. Anyone can learn something from this billionaire investor and philosopher. Q2 2020 hedge fund letters, conferences and more If you’re looking for value Read More
The title was “Get Ready to be Showered by Helicopter Money.” And the voices behind this policy are growing.
Free money to your bank account
The idea is relatively simple: give people money… watch them spend it to stimulate the economy. This kind of behavior modification is usually done through tax cuts or spending programs.
Helicopter money, however, would take it a step further and deposit money directly into people’s bank accounts. What’s a better way to spur spending? Inject funds straight into the economy instead of trying to influence bond yields or sentiment.
Consumption makes up 70% of the US economy. So increased spending would no doubt boost the economy, including wages and jobs.
Sign me up!
Here are a few investors who recently got on board with the idea or think it’s likely…
- Economists at Citigroup, HSBC Holdings, and Commerzbank AG all published reports on the topic in March.
- Well-known hedge fund manager Ray Dalio sees potential in the idea: “Governments will eventually have to resort to policies that encourage spending.”
- European Central Bank President Mario Draghi called it a “very interesting concept.”
- When asked, European Central Bank chief economist Peter Praet refused to rule it out. “All central banks can do it.”
- Economist Nouriel Roubini: “It’s a logical option for any country struggling with deflation and slow growth, as Japan has and perhaps other countries some day may.”
- Gabriel Stein, Oxford Economics economist: “… the topic is receiving considerably more attention. The likelihood is reasonably high of some form being implemented somewhere.”
- Jonathan Loynes of Capital Economics on the idea of helicopter money: “The clear lesson of recent years has been that seemingly unimaginable policy measures previously confined to theory or history books can become reality if extraordinary economic circumstances persist for long enough.”
- Richard Clarida, Columbia University economist, predicts: “We will see a variant of helicopter money (perhaps thinly disguised) in the next 10 years, if not the next five.”
Let’s be honest, free money sounds great. And you might agree if you start daydreaming about what you’d buy with additional $1,000 or $5,000 in your bank account.
The truth is, nothing is free (not even “free” college or “free” healthcare). Here are some of the potential problems with helicopter money…
- Inflation: Spraying money around would eventually lead to not just a rise in inflation, but potentially runaway inflation.
And once the inflation genie is out of the bottle, it’s hard to control. It took about a decade to rein it in after inflation hit double digits in the 1970s.
- Bloated government debt: European Central Bank Governing Council member Jens Weidmann summed it up best: “Helicopter money isn’t manna falling from heaven, but would rip huge holes in central bank balance sheets.”
Global government debt levels are already high, which limits the options central bankers and politicians have at their disposal. Depositing money into bank accounts would worsen this problem.
- Damage to central bank credibility: This is a big reason gold is rising now: distrust in what the Fed and other central banks can realistically do to combat slow growth.
Make no mistake; helicopter money is a drastic step, and everybody knows it. There would be a reaction by investors. Gold, for one, would continue to rise.
- Lack of spending: You can give people money, but what if they don’t spend it like you intended? The policy could backfire if households sit on the funds.
Remember the great closing line from the movie, Too Big to Fail? Hank Paulsen, played by William Hurt, said “They’ll use [the money] the way we want… won’t they?”
- The law: The ECB is prohibited from financing states directly. And the Fed is limited in what assets it can buy.
Of course, governments can change laws, but this could open the floodgates; what other laws will people want changed, especially if things spin out of control?
The big question
This policy will naturally raise a lot of questions, but you have to start with this one:
- Why resort to such a drastic policy when we’re told the economy is stable, improving, or even strong?
Bank of America recently said there had been 637 rate cuts and $12.3 trillion spent on assets around the world since 2008. They also estimated that 489 million people now live in countries where rates are negative.
With so much government stimulus and intervention, one could logically conclude that we hardly need to reach further down the ladder. Even a glass-half-full kind of person has to somehow reconcile the constant message that the economy is strong with the drastic actions central bankers continue to take.
The growing message instead seems to be that central planners need to head even deeper into uncharted territory.
And one of those “uncharted” ways could be to shower people with free money.
Things will turn ugly
Helicopter money won’t solve the big problems and will likely make things worse.
I like how HSBC senior economic adviser Stephen King put it: “The helicopter option is simple, easily implemented and, for some, offers the closest thing to a free lunch. But if this sounds too good to be true, that’s because it is.”
But it doesn’t matter what you and I think, because politicians and central bankers will do whatever they think is necessary, regardless of how asinine the “solution” may be.
All you can do is protect yourself. That’s exactly what hedge fund manager Dan Tapiero says you must do.