The Evolution of Helicopter Money

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Posted: May 17, 2016 12:01 AM
The Evolution of Helicopter Money

By: Tim Maverick, Senior Correspondent

Some things never change. Birds fly. Fish swim.

And central bankers will always come up with crazy schemes to stimulate their economies despite massive debt.

Despite efforts, zero and negative interest rates are not working. So, according to noted experts on the bond market and the Fed – including Jeffrey Gundlach of DoubleLine Capital and Bill Gross of Janus Capital, not to mention Ray Dalio of Bridgewater Associates as well as famed economist Nouriel Roubini – it’s time to prepare for the next round of unconventional policy from the Federal Reserve and international central banks.

In fact, Bill Gross says this newfangled remedy to a global economic slump may be put into action within a year.

But what is this crazy new methodology?

It’s a variation of one of their latest efforts: helicopter money 2.0, the Ben Bernanke remix.

Money From the Skies

The term “helicopter money” was first used by noted economist Milton Friedman in a 1969 paper titled “The Optimum Quantity of Money.”

After laying dormant for 30 years, the term was revived in 1999 and again in 2002, during two speeches given by former Fed Chairman Ben Bernanke forever earning him the nickname “Helicopter Ben.”

The concept was simple enough.

In order to overcome deflation and get the economy moving again, the Federal Reserve could print boatloads of money. And then, through Federal Government channels, they would distribute the money to the masses, to get them spending.

A little extra money in the pockets of the people not only makes for happy citizens, but also means a widespread boost to industries across the board.

Dumping cash out of a helicopter to the people below was, of course, only rhetorical.

Democratic Helicopter Money

“Helicopter money,” as a concept, has since evolved in order to make it a more feasible option for economic impetus.

Ben Bernanke and other economists now envision what British economist and Oxford professor Simon Wren-Lewis calls “democratic helicopter money.”

The people aren’t considered smart enough to spend the money they get, under this elitist view.

In the Bernanke version of “helicopter money,” the Fed prints out that same boatload of money. But instead of putting the excess funds into the pockets of the citizens, the money is set aside for the fiscal authorities (government) to spend as it sees fit.

In other words, it’s government spending gone wild!

Obviously this raises some major concerns. A system of checks and balances would need to be developed and implemented just to oversee the allocation of this money. If history tells us anything, it’s safe to say that the programs and infrastructure that most need the funding would, as always, end up ignored.

With thinly veiled ideas like this in the works, is it any wonder the Trump and Sanders populist campaigns have gained so much traction in 2016?

Hobson’s Choice

Of course, the Fed may reject the idea altogether, as the notion that the government be allowed to print itself some spending cash is pretty absurd.

Ultimately, it may result in more quantitative easing (QE) – the buying of bonds – which just continues to funnel money to Wall Street.

That leaves a sort of Hobson’s Choice for We the People: Do we want the money from the Fed to go to Uncle Sam or Wall Street? The option of having that money sent directly to the citizens is now off the table and it’s basically a matter of determining the lesser of two evils.

Either way, helicopter money is becoming a reality.

Bill Gross explained, “There is a rude end to flying helicopters, but the alternative is an immediate visit to austerity rehab and an extended recession. I suspect politicians and central bankers will choose to fly, instead of die.”

What to Expect

That “rude end” to which Gross is referring involves a deep recession and a bear market.

But even that could be years away, depending on how fast central bankers move towards a modified helicopter money arrangement.

In the meantime, interest rates will continue their downward spiral, even here in the U.S. We may not go negative like the rest of the world – with nearly $10 trillion of sovereign bonds now in negative yield – but I expect the 10-year bond to hit a 1% yield. Perhaps within a year.

Stocks will continue to be inflated by these ultra-low rates, which have left investors with few viable alternatives for earning a positive return.

Negative rates will continue boosting precious metals’ prices upward, as well. If nothing else, these will prove useful when that “rude end” does occur.

So stock up on gold and silver. You never know how soon you’ll be needing it.

Good Investing,

Tim Maverick

Tim Maverick boasts decades of experience in the investment world. He spent 20 years at a major brokerage firm as a trading supervisor and broker working directly with clients. He also wrote the daily market update for the firm’s Mid-Atlantic Region. Tim has been writing for financial publications for the past 10 years. Before joining Wall Street Daily, he wrote for Tim Seymour's (CNBC) Emerging Money, Tom Lydon's ETF Trends, Commodity HQ, Money Morning, Investment U, and Wyatt Investment Research. With Tim's experience working with retail investors, he's particularly adept at helping everyday investors understand the financial markets. Follow Tim on twitter@TimMaverickWSD.