The World Just Turned Insane…

  • Helicopters or empty mines?
  • In-vested interest
  • Conference update

Even the sane can sometimes say insane things. This from Bloomberg:

Billionaire bond manager Bill Gross, who has criticized central banks’ asset purchases as a Ponzi scheme, said the next step in economic stimulus efforts may be so-called helicopter money showered into people’s pockets without new private borrowing or taxes.

“Drop the money from helicopters,” Gross, manager of the $1.3 billion Janus Global Unconstrained Bond fund, wrote in his monthly investment outlook for May. “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.”

The article goes on:

“Our new age economy — especially that of developed nations with aging demographics — is gradually putting more and more people out of work,” he wrote. “If more and more workers are going to be displaced by robots, then they will need money to live on, will they not? And if that strikes you as a form of socialism, I would suggest we get used to it. Even Donald Trump claims he won’t leave anyone out on the street.”

If we had any doubts about a financial calamity before, we have no doubts now. In our view, it’s inevitable. More on this theme in a moment. First…

Markets

Overnight, the Dow Jones Industrial Average gained 9.45 points, or 0.05%.

The S&P 500 index fell 0.49 points, or -0.02%.

In Europe, markets were similarly flat. The Euro Stoxx 50 index closed up 0.05%, while the FTSE 100 index gained 0.09%.

In Asia, there is a little more action. The Nikkei 225 index is currently down 109.27 points, or 0.68%. The Shanghai Composite index is down 59.48 points, or 1.98%.

In Australia, after a drop of more than 1% after the open, the S&P/ASX 200 index is currently up 0.64 points, or 0.01%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$43.77 per barrel. Gold is trading for US$1,280 per ounce.

In Aussie dollars, gold is trading for AU$1,730 per ounce.

The Aussie dollar is worth 73.89 US cents.

Helicopters or empty mines?

The comments attributed to Bill Gross above are concerning.

Until a couple of years ago, Gross ran the PIMCO bond funds, and was the world’s biggest bond fund manager.

In other words, Bill Gross is an important and respected name in financial markets.

Now, that doesn’t necessarily mean much. There are many important and respected names in the financial markets.

But what makes his comments more troubling than some of the other comments we’ve seen regarding ‘helicopter money’ is that Gross has been sceptical and critical of central banks in the past.

It makes us wonder just how widespread the idea of giving away ‘free’ money has become. After all, if Bill Gross now thinks it’s a good idea, who’s left to argue against it?

The formerly respectable Economist magazine (or ‘newspaper’ as it pathetically insists on referring to itself) contained an editorial last week suggesting ‘helicopter money’ wasn’t such a crazy idea.

And while Bank of England chief economist, Andrew Haldane, last year spoke about abolishing cash in order to make it easier to impose negative interest rates, abolishing cash would also make it easier to ‘drop’ electronic cash into millions of bank accounts in a flash.

Once the money has been credited to accounts, the central bank or government could then say that you’ve got a certain number of days to spend it, otherwise they’d deduct interest from the balance.

But wait. Doesn’t all that sound completely ridiculous?

It sure does. If we zipped back in time to 2007, and you read the same thing, you’d think we were lunatics. You may still think so…but the idea itself is no longer lunacy.

In fact, it’s an idea that’s becoming more and more mainstream by the day. And Bill Gross’ comments on the matter have, unfortunately, given the idea a big dose of respectability.

Gross’ comments on ‘helicopter money’ follow just a few weeks after former US Federal Reserve chairman, Dr Ben S Bernanke, considered the idea in his blog for the Brookings Institution. He wrote:

In this post, I consider the merits of helicopter money as a (presumably last-resort) strategy for policymakers. I make two points. First, in theory at least, helicopter money could prove a valuable tool. In particular, it has the attractive feature that it should work even when more conventional monetary policies are ineffective and the initial level of government debt is high. However, second, as a practical matter, the use of helicopter money would involve some difficult issues of implementation.

A ‘valuable tool’. Hmmm.

Aside from ‘helicopter money’ being a terribly inflationary idea, few seem to have pointed out the qualifier, which economist Milton Friedman attached to his ‘helicopter money’ theory.

Here’s the full quote, which Dr Bernanke kindly shared with readers of his blog:

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.

As we argued earlier this week, the Australian government implemented such a policy in 2009, when it credited $900 to the bank account of almost every taxpayer in Australia.

At the time, the mainstream thought it would work. Treasurer Wayne Swan won the Treasurer of the Year award, and Treasury Secretary at the time, Ken Henry, was a hero.

It turns out that, like all stimulus programs, the effect never lasts. It soon wears off. That happened in this instance, and is part of the reason why the Australian federal government now has a debt of $424 billion.

But it’s the final part of Friedman’s statement that’s important. It’s the idea that the crediting of bank accounts would be a ‘unique event which will never be repeated.

The point here is that if folks believe it’s a one-off event, it may not result in an inflationary impact on the economy — people will assume this is the only payment and, therefore, they won’t rush to spend it on the assumption that prices will rise.

There are two problems with that.

First, after everything central banks have done over the past eight years, no one in their right mind could think that Helicopter Money I won’t be followed by Helicopter Money II…and then Helicopter Money III.

Second, the message from governments and central banks is that they want people to spend. That’s the very notion of negative interest rates — spend it before you lose it.

If governments and central banks spin the yarn that they will only do this once, folks may not rush out to spend it. They may choose to save it, defeating the plan’s purpose.

But let’s be blunt. The fact that we’re even discussing this insane idea is in itself cause for worry.

Our only analogy for this is to compare it to a man stranded on a desert island that slowly goes insane. The markets, commentators, and serious analysts are going insane.

The current period of economic depression has lasted since 2008. So far, there doesn’t appear to be an end in sight.

The longer the malaise continues, the more these so-called experts try to create ways to get out of it. As each plan perishes, they search for ever more wild ideas.

The man stranded on the desert island must feel the same way. First the raft, then the boat, then the…what? The tunnel? The spaceship? Anything to get off the island.

Insanity isn’t far away.

We can only imagine the whacky plans world governments and central banks will develop next. Actually, we can’t imagine. Or it’s hard to imagine.

What’s left? What if they institute ‘helicopter money’ and that doesn’t work? We’re surprised they haven’t yet turned to John Maynard Keynes’s ‘money in a mine’ plan.

That is, bury bundles of cash in a disused mine, cover it up, and then pay people to dig it up again. The purpose? God only knows. Apparently, Keynes thought it was a stimulus plan worthy of serious thought.

Do not be surprised if this plan too soon sees the light of day.

In-vested interest

Resource Speculator editor Jason Stevenson sent us this note in response to Bill Gross’ enthusiasm for ‘helicopter money’:

Let’s not forget folks, Gross runs a billion dollar bond fund and bonds have no bid. He’s stuffed and he knows it. When the sovereign debt crisis hits, he won’t be able to get rid of his positions. So, helicopter money is entirely in his self-interest.

Good point. If interest rates begin to rise quickly, that won’t be good news for bond funds.

Conference update

All this ties in to our 2016 investment conference. We’re just over a week away from revealing the details of dates, speakers, and venue.

The topic of ‘helicopter money’ is timely. It fits into our broader theme of recession, depression, and repression.

Central banks and governments are doing terrible things to the value of money. Investors and savers need to find a way to combat this.

We can’t guarantee that we’ll give you the solution at our conference, but I’m certain the line-up of speakers we’ve assembled will do their darnedest to give it a try.

Stay tuned.

Cheers,

Kris