“Helicopter Money and Debt Cancellation” Are the Endgame
January 22, 2015
(This item originally appeared in Forbes.com on January 22, 2015.)
The European Central Bank today revealed its long-awaited asset-purchase program, also known as “Quantitative Easing.” The ECB will purchase 60 billion euros of debt assets per month beginning in March, and continuing to at least September 2016, for a total of 1.14 trillion of asset purchases. These purchases will be paid for “with the printing press,” or more technically, an expansion of the monetary base.
This comes on top of the Bank of Japan’s own stepped-up money-printing scheme, which is now at a rate of 80 trillion yen per year – about 17% of GDP, and well in excess of the government’s deficit of 7.6% of GDP in 2013. The ECB’s money-printing plans come to roughly 7.6% of eurozone GDP per year. To put it another way, all the eurozone governments together could run a deficit of 7.6% of GDP, and the ECB could fund it all with the printing press. As it is, eurozone governments’ aggregate deficits are running around 2.3% of GDP.
In November, Deutschebank strategist Jim Reid said that his large institutional clients “were talking about helicopter money and debt cancellation being the end game. … Perhaps there’s an increasing weariness that more QE globally whilst inevitable, is a blunt growth tool and that stopping it will be extremely difficult.”
It has not been very well appreciated that the Fed’s own QE program, 2012-2014, was largely offset by a similar size contraction in the ECB’s base money supply during the same time period. This was caused primarily by the runoff of the ECB’s “long-term refinancing operation” direct bank lending. In other words, the total dollar+euro base money supply grew by a relatively modest amount in that time period. Also, banks themselves have had a high demand for central bank deposits as a form of “cash.” “Cash” has historically formed about 10% of total assets at large commercial banks, but this “cash” was largely in the form of overnight lending to other financial institutions. Today, banks would much rather hold deposits at central banks than make loans to other banks.
The result of this was that foreign banks (mostly European I think) came to hold a large amount of total Fed deposits, also known as “bank reserves” and a form of base money. In the past, foreign banks held only negligible portion of total Fed deposits, but today they hold about 50%. The result of the ECB’s expansion will be that ECB deposits or “bank reserves” of eurozone banks will expand in aggregate, whether they like it or not. This might offset some demand from eurozone banks for Fed deposits.
This is a somewhat complicated way of saying that world central banks’ balance sheets have become somewhat fungible; particularly between the Fed and ECB. The ECB prints money not only for Europe, but for us all. Japan is somewhat more independent. But, even there, I note that the new bout of money-printing in Japan has been accompanied by a rotation by the Government Pension Investment Fund (the equivalent of the “Social Security Trust Fund” in the U.S., in both cases a sort of internal accounting convention of the central government) out of Japanese government bonds and into U.S. Treasury bonds. What this means, in effect, is that the Japanese government broadly conceived (the central bank, central government and GPIF) has been printing money and buying U.S. Treasury bonds. Which is convenient, considering that the U.S. Fed itself stopped buying these bonds through its own QE program just as Japan’s GPIF said it would step up its U.S. Treasury buying, and the BOJ said it would step up its money-printing. It’s almost as if someone planned it that way.
And so we see the “helicopter money and debt cancellation endgame” coming into view, despite the fact that expectations of increasing inflationary pressures have been wrong over the past couple years.
I mention all of this because one of my goals is to lay the framework for what happens afterwards. I’ve always known that no major changes are going to take place as long as what’s being done seems to be working. It is only when the old ways fail that change is possible. I don’t know what the euro price of gold, the yen/dollar rate, or the state of Europe’s bank depositors and sovereign governments will be in six months (“debt cancellation” and “bail-in”), but I am pretty sure that all of this will end in disaster, and that we are already in the process of it ending in disaster, without any significant intervening period.
The reason it tends to end in disaster, historically, is because nobody changes anything while it seems to be working. Thus, people continue along a course which, naturally, when pursued for an extended time, ends in disaster. It is easy to forget that Germany’s government, like the governments of the U.S. and Britain, printed money to fund World War I for five years, 1914-1919, and suffered no particular adversity as a result. It worked great!
If things get disastrous enough, we may finally see people begin to abandon what I call “Mercantilist” monetary ambitions – the idea that we can, and should, manage the economy with manipulation of the currency, interest rates, trade relationships (foreign exchange rates), and all of these other things that we have become so familiar with today. We might return to the “Classical” ideals that the United States embraced for most of its history, in which money is a neutral agent of commerce, ideally as stable, reliable and free of human intervention as other weights and measures like the meter and kilogram.
At that point – and not before! – people begin to look for ways to achieve this ideal in the real world, and before too long conclude that there is no better solution that the same solution that prior generations used: a gold standard system.
A “gold standard” is really a type of fixed-value system, no different than variants of the euro-based fixed-value systems used by at least fifty-five countries today. The only major difference between a “gold standard” system and a “euro standard” system as used today by Germany, Slovakia, Bulgaria or Niger, is the choice of the “standard of value.”
There have been a lot of good reasons to use a “euro standard,” particularly the fact that you can borrow large amounts of money at low interest rates via euro-denominated loans, and also that stability of exchange rates facilitates trade. However, there are also good reasons why today’s floating-fiat euro might not be a good “standard of value” going forward – about 720 billion good reasons per year, beginning in March – which is why Switzerland’s central bank just gave up its de facto euro link. They’re getting off that train. An independent Swiss franc won’t provide any meaningful refuge either, just as it failed to do so in the 1970s.
I don’t really care if you find my affinity for gold as a “standard of value” in monetary systems appealing or not.
Because, I know you will change your mind – not because of my persuasions, but because your world is burning to the ground. It’s already burning. Can’t you see?