NOTE TO READERS
I am in the throes of finishing a book on the upheaval represented by the Trump candidacy and movement. It is an exploration of how 30 years of Bubble Finance policies at the Fed, feckless interventions abroad and mushrooming Big government and debt at home have brought America to its current ruinous condition.
It also delves into the good and bad of the Trump campaign and platform and outlines a more consistent way forward based on free markets, fiscal rectitude, sound money, constitutional liberty, non-intervention abroad, minimalist government at home and decentralized political rule.
In order to complete the manuscript on a timely basis, I will not be doing daily posts for the next week or two. Instead, I will post excerpts from the book that crystalize its key themes and which also relate to the on-going gong show in the presidential campaigns and in the financial and economic arenas. Another of these is included below.
I am also working with my partners at Agora Financial on a new version of Contra Corner. More information on that will be coming later this month.
……..As the stock market reached its lunatic peak near 2200 in August, the certainty that the Fed is out of dry powder and that the so-called economic recovery is out of runway gave rise to one more desperate pulse of hopium.
Namely, that the central banks of the world were about to embark on outright ‘helicopter money’, thereby jolting back to life domestic economies that are sliding into deflation and recession virtually everywhere—– from Japan to South Korea, China, Italy, France, England, Brazil, Canada and most places in-between.
That latter area especially includes the United States. Despite Wall Street’s hoary tale that the domestic economy has “decoupled” from the rest of the world, the evidence that the so-called recovery is grinding to a halt is overwhelming.
After all, the real GDP growth rate during the year ending in June was a miniscule 1.2%. It reflected the weakest 4-quarter rate since the Great Recession.
And even that was made possible only by an unsustainable build-up in business inventories and the shortchanging of inflation by the Washington statistical mills. Had even a semi-honest GDP deflator been used, the US economy would have posted real GDP on the zero-line, at best.
So the stock market’s 19% melt-up from the February 11 interim low of 1829 on the S&P 500 was positively surreal. There was not an iota of sustainability to it. In fact, “interim” was exactly the right word for a low that is going a lot lower, and soon.
Indeed, the spring-summer rebound was the work of eyes-wide-shut day traders and robo-machines surfing on a thinner and thinner cushion of momentum. What must come next, in fact, is exactly what happens when you stop peddling your bicycle. To wit, momentum gets exhausted, gravity takes over and the illusion of stability is painfully shattered.
But these revelers are going to need something stronger than the hope for “helicopter money” to avoid annihilation when the long-running central bank con job finally collapses. Indeed, that denouement lies directly ahead because helicopter money is a bridge too far and valuations are literally perched in the nosebleed section of history.
As to the latter point, the S&P 500 companies posted Q2 2016 earnings for the latest 12 month period at $86.66 per share. So at the August bubble high the market was being valued at a lunatic 25.1X.
Even in a healthy, growing economy that valuation level is on the extreme end of sanity. But actual circumstances are currently more nearly the opposite. That is, earnings have now been falling for six straight quarters in line with GDP growth that has slumped to what amounts to stall speed.
In fact, reported earnings for the S&P 500 peaked at $106 per share in the 12 months ended in September 2014. That means that earnings had fallen by 19% since then, even as the stock market moved from 1950 to nearly 2200 or 13% higher.
This is called multiple expansion in the parlance of Wall Street, but it’s hard to find a more bubblicious example. Two years ago the market was trading at just 18.4X, meaning that on the back of sharply falling earnings the PE multiple had risen by 36%!
Valuation multiples are supposed to go up only when the economic and profits outlook is improving, not when it’s unmistakably deteriorating as at present. But during the spring-summer melt-up these faltering fundamentals were blithely ignored on the hopes of a second half growth spurt and, failing the latter, that the Fed would again pull the market’s chestnuts out of the fire.
The growth spurt absolutely has not happened, and the recent sharp decline in in-bound containers at the West Coast ports means that the US retail sector is not provisioning for any rebound in sales during the coming fall and holiday seasons.
And that is why the Wall Street gamblers are so desperately hoping for helicopter money. The fact is, the Fed is out of dry powder via the “extraordinary” measures it has employed since the financial crisis.
To wit, in the event the economy is visibly drifting into recession, it cannot go to sub-zero interest rates without triggering a Donald Trump led domestic political conflagration. Nor can it abruptly shift to a huge new round of QE without confessing that $3.5 trillion of the same has been for naught.
Yet “helicopter money” isn’t some kind of new wrinkle in monetary policy, at all. It’s an old as the hills rationalization for monetization of the public debt—–that is, purchase of government bonds with central bank credit conjured from thin air.
It’s the ultimate in “something for nothing” economics. That’s because most assuredly those government bonds originally funded the purchase of real labor hours, contract services or dams and aircraft carriers.
As a technical matter, helicopter money is exactly the same thing as QE. Nor does the journalistic confusion that it involves “direct” central bank funding of public debt make a bit of difference.
Suppose Washington issues treasury bonds to the 23 primary dealers on Wall Street in the regular manner. Further, assume that some or all of these dealers stick the bonds in inventory for 3 days, 3 months or even 3 years, and then sell them back to the Fed under QE (and most likely at a higher price).
The only thing different technically about “helicopter money” policy is the suggestion by Bernanke and others that the treasury bonds could be issued directly to the Fed. That would just circumvent the dwell time in dealer (or “investor”) inventories but result in exactly the same end state. In that event, of course, Wall Street wouldn’t get the skim.
Why Helicopter Money Is The Ultimate Beltway Scam
But that’s not the real reason why helicopter money policy is so loathsome. The unstated essence of it is that our monetary politburo would overtly conspire and coordinate with the White House and Capitol Hill to bury future generations in crushing public debts.
They would do this by agreeing to generate incremental fiscal deficits—-as if Uncle Sam’s current $19 trillion isn’t enough debt—–which would be matched dollar for dollar by an increase in the Fed’s bond-buying or monetization rate. That amounts not only to teaching children how to play with matches; it’s tantamount to setting fiscal forest fires across the land.
There are a few additional meaningless bells and whistles to the theory, but its essential crime against democracy and economic rationality should be made very explicit. To wit, it would amount to a central bank power grab like no other because it insinuates our unelected central bankers into the very heart of the fiscal process.
Needless to say, the framers delegated the powers of the purse—spending, taxing and borrowing—–to the elected branch of government, and not because they were wild-eyed idealists smitten by a naïve faith in the prudence of the demos.
To the contrary, they did so because the decision to spend, tax and borrow is the very essence of state power. There is no possibility of democracy—-for better or worse—-if these fundamental powers are removed from popular control.
Yet that’s exactly what helicopter money policy would do. Based on the Keynesian gobbledygook we debunked in Chapter 4 about the purported gap between full-employment or “potential GDP” and actual output and employment, the Fed would essentially set a target for the Federal deficit.
In practice, it would also likely throw-in some gratuitous advice about its composition between tax cuts, infrastructure spending and social betterment. The recommended mix would arise from an FOMC whim as to whether in their wisdom its 12 members thought household consumption or fixed asset investment needed to be goosed more.
At one level, of course, it is to be expected that the peoples’ elected representatives would relish this “expert” cover for ever bigger deficits and the opportunity to wallow in the pork barrel allocation of the targeted tax cuts and spending increases.
There is surely not a single hard core New Dealer turning in his grave who could have imagined a better scheme for priming the pump.
Yet helicopter money turns the inherently dangerous idea of fiscal borrowing in a democracy into an outright monetary fraud, and that prospect is sure to kindle vestigial fears of the public debt even among the politicians.
Indeed, there is a long history on exactly that point. For example, even New Dealer FDR worried about the rising public debt and “Fair Dealer” Harry Truman positively loathed it.
Likewise, the power-mad Lyndon Johnson essentially voluntarily vacated the oval office when he finally agreed to a substantial tax hike in early 1968 order to stem the deficit hemorrhage from his guns and butter policies.
Even the greatest deficit spender of his time—–Ronald Reagan—-thought the resulting explosion of the public debt was half Jimmy Carter’s fault and half due to defense spending increases, which didn’t count in his unique way of reckoning the national debt.
Likewise, the clueless George W. Bush thought the Greenspan housing boom would last forever and thereby cause the nation’s fiscal accounts to come back into balance on their own. Similarly, Obama has insisted that the $8 trillion of new public debt on his watch to date was owing to the Great Recession—– a one-time impact that his policies have purportedly remedied.
By contrast, the deliberate, wanton addition of trillions to the public debt just so that the Fed can print an equivalent amount of new credit out of thin air is a fish of an altogether different kettle. When push comes to shove even today’s beltway politicians are likely to find the underlying theory of helicopter money to be beyond the pale.
And that’s especially true owing to the Bernanke fillip.
It goes without saying, of course, that the Bernank is no hero whatsoever—–notwithstanding his self-conferred glorification for the courage to print. In fact, he is a demented paint-by-the-numbers Keynesian who has a worse grasp on the real world than the typical astrologer.
That’s why the crucial element in his helicopter money scheme, as he explained in a recent Washington Post op ed, will leave them scratching their heads even in the always credulous Capitol Hill hearing rooms.
According to Bernanke, the secret sauce of helicopter money is an explicit and loud announcement by the Fed that the incremental public debt will be permanent. It will never, ever be repaid——not even in the fictional by-and-by of the distant future.
But the reason for it is downright lunatic.
To wit, unless current taxpayers are assured that future taxes will not rise owing to Washington’s helicopter money handouts and tax breaks, says the Bernank, they won’t spend the government gifts they find strewn along the path of flight!
That’s right. When a road building boom from helicopter money appropriations results in surging demand at the sand and gravel pits, the small-time businessman involved won’t buy any additional trucks or hire any additional drivers until Washington assures them that they won’t pay higher taxes 25 years hence!
Only in the Eccles Building puzzle palace does such drivel not elicit uncontainable guffaws. Only in Sweden do they give Nobel Prizes for the academic obscurantism called “rational expectations theory” that is the basis for Bernanke’s whacky theories.
Why Helicopter Money Will Be A Giant Dud If Tried In The US
So at the end of the day, “helicopter money” is just a desperate scam emanating from the world’s tiny fraternity of central bankers who have walked the financial system to the brink, and are now trying to con the casino into believing they have one more magic rabbit to pull out of the hat.
They don’t. That’s because helicopter money will not pass the laugh test even in the Imperial City, and, more importantly, because it takes two branches of the state to tango in the process of implementation.
Unlike ZIRP and QE, helicopter money requires the peoples’ elected representatives to play and on an expedited basis. That is, the Congress and White House must generate large incremental expansions of the fiscal deficit—so that the central bankers can buy it directly from the US treasury’s shelf, and then credit the government’s Fed accounts with funds conjured from thin air.
But this assumes there is still a functioning government in Washington and that politicians have been 100% cured of their atavistic fears of the public debt.
Alas, what is going to cause helicopter money to be a giant dud—-at least in the US——is that neither of these conditions are extant.
Regardless of whether the November winner is Hillary or the Donald, there is one thing certain. There will be no functioning government come 2017. Washington will be the site of a political brawl of deafening and paralyzing aspect—–like none in modern US history, or ever.
At the same time, the existing budget deficit is already reversing, and will end the current year at more than $600 billion. That’s baked into the cake already based on the recent sharp slowdown in revenue collections, and means that the FY 2016 deficit will be one-third higher than last year’s $450 billion.
Moreover, when the new Congress convenes next February the forward budget projections will make a scary truth suddenly undeniable. As we showed in Chapter 9, the nation is swiftly heading back toward trillion dollar annual deficits under existing policy and even before the impact of a serious recessionary decline.
The reality of rapidly swelling deficits even before enactment of a massive helicopter money fiscal stimulus program will scare the wits out of conservative politicians, and much of the electorate, too. And the prospect that the resulting huge issuance of treasury bonds will be purchased directly by the Fed will only compound the fright.
What fools like Bernanke haven’t reckoned with is that sheer common sense has not yet been extirpated from the land. In fact, outside of the groupthink of few dozen Keynesian academics and central bankers, the very idea of helicopter money strikes most sensible people as preposterous, offensive and scary.
Even if Wall Street talks it up, there will be massive, heated, extended and paralyzing debate in Congress and the White House about it for months on end. There is virtually no chance that anything which even remotely resembles the Bernanke version of helicopter money could be enacted into law and become effective before CY 2018.
So Then Comes The Crash
Will the boys and girls still in the casino after the current election gong show is over patiently wait for their next fix from a beltway governance process that is in sheer pandemonium and stalemate?
We think the odds are between slim and none. As we indicated previously, if Trump is elected the fiscal process will lapse into confrontation and paralysis for an indefinite spell.
And it Hillary is elected, the Republican House will become a killing field for almost anything she proposes, and most especially the rank Keynesian apostasy of outright and massive debt monetization……