Thursday, February 14, 2013

Thursday, February 14, 2014 - Helicopter Money

Helicopter Money
by Sinclair Noe

DOW – 9 = 13,973
SPX + 0.98 = 1521
NAS + 1 = 3198
10 YR YLD - .03 = 1.99%
OIL + .36 = 97.37
GOLD – 7.20 = 1636.40
SILV - . 33 = 30.55

A reminder I will be speaking at the 2013 Wealth Protection Conference April 5th. To register or for more information, please visit:

Happy Valentine's Day.

The G-20 meets this weekend. Currency devaluation will be a major topic. There is a race to devalue currencies, with the payoff being more exports for the winning or losing country. The winner in the race to the bottom looks to be the UK; over the past five years, the pound sterling is the weakest major currency. London's role as a financial center made in vulnerable to the banking problems, and then the government imposed austerity measures, making a bad situation far worse. Since the end of last year the pound has weakened dramatically against all other major currencies, apart from the yen. The British and Japanese currencies seem to be falling for similar reasons. Those countries’ economies have experienced almost no growth since 2009, and their governments are becoming increasingly desperate to end this long-term stagnation.

This past week, saw some important speeches that were largely overshadowed here in the US by the State of the Union address. The Bank of Japan's Shinzo Abe announced monetary expansion should directly finance record breaking public investment programs. The other big speech came from Adair Turner, chairman of Britain's Financial Services Authority; and this speech is now being called the “helicopter money” speech. Ellen Brown has done an excellent analysis of Turner's speech and I have a link at my blog. Turner's idea of helicopter money is a bit different than Ben Bernanke's. Although both involve throwing bags of money out of helicopters, Bernanke's chopper never hovered anywhere except directly over Wall Street.

Turner's recommendation was supported by a 75-page paper explaining why handing out newly created money to citizens and governments could solve economic woes globally and would not lead to hyperinflation. Government-issued money would work because it addresses the problem at its source. Today, we have no permanent money supply. People and governments are drowning in debt because our money comes into existence only as a debt to banks at interest. We are completely dependent on the banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money, we are prosperous; if not, we starve.

In the US monetary system, the only money that is not borrowed from banks is the “base money” or “monetary base” created by the Treasury and the Fed. The Treasury creates only the tiny portion consisting of coins. All of the rest is created by the Fed.

Most of the money the Fed creates is electronic rather than paper. We the people have no access to this money, which is not turned over to the government or the people but goes directly into the reserve accounts of private banks at the Fed.

It goes there and it stays there. Except for the small amount of “vault cash” available for withdrawal from commercial banks, bank reserves do not leave the doors of the central bank. In a modern monetary system there is absolutely no correlation between bank reserves and lending. Banks do not lend “reserves”. Whether commercial banks let the reserves they have acquired through QE sit “idle” or lend them out in the internet bank market 10,000 times in one day among themselves, the aggregate reserves at the central bank at the end of that day will be the same.

Banks do not lend their reserves to us, but they do lend them to each other. The reserves are what they need to clear checks between banks. Reserves move from one reserve account to another; but the total money in bank reserve accounts remains unchanged, unless the Fed itself issues new money or extinguishes it.

The base money to which we have no access includes that created on a computer screen through “quantitative easing” (QE), which now exceeds $3 trillion. That explains why QE has not driven the economy into hyperinflation, as the deficit hawks have long predicted; and why it has not created jobs, as was its purported mission. The Fed’s QE money simply does not get into the circulating money supply at all.

What we the people have in our bank accounts is a mere reflection of the base money that is the exclusive domain of the bankers’ club. Banks borrow from the Fed and each other at near-zero rates, then lend this money to us at 4% or 8% or 30%, depending on what the market will bear. Like in a house of mirrors, the Fed’s “base money” gets multiplied over and over whenever “bank credit” is deposited and relent; and that illusory house of mirrors is what we call our money supply.

The only thing quantitative easing is doing is to help banks increase the liquidity of their portfolios by getting rid of longer-dated and slightly less liquid assets and raising cash. Turner's helicopter money idea apparently involves credit creation by the central bank for productive purposes in the real, physical economy. It would involve the government printing money, much like the colonial scrip in pre-Revolutionary War America or the “greenbacks" of Abraham Lincoln's time.

The threat of price inflation is the excuse invariably used for discouraging this sort of “irresponsible” monetary policy today. The inflationistas argue that when the quantity of money goes up, more money will be chasing fewer goods, driving prices up.

What this theory overlooks is the supply side of the equation. As long as workers are sitting idle and materials are available, increased “demand” will put workers to work creating more “supply.” Supply will rise along with demand, and prices will remain stable.

True, today these additional workers might be in China or they might be robots. But the principle still holds: if we want the increased supply necessary to satisfy the needs of the people and the economy, more money must first be injected into the economy. Demand drives supply. People must have money in their pockets before they can shop, stimulating increased production. Production doesn’t need as many human workers as it once did. To get enough money in the economy to drive the needed supply, it might be time to issue a national dividend divided equally among the people.

Increased demand will drive up prices only when the economy hits full productive capacity. It is at that point, and not before, that taxes may need to be levied—not to fund the federal budget, but to prevent “overheating” and keep prices stable. Overheating in the current economy could be a long-time coming, however, since according to the Fed’s figures, $4 trillion needs to be added into the money supply just to get it back to where it was in 2008.

The Federal Reserve has lavished over $13 trillion in computer-generated bail-out money on the banks, and still the economy is flagging and the debt ceiling refuses to go away. If this money had been pumped into the real economy instead of into the black hole of the private banking system, we might have a thriving economy today.

Would Turner's helicopter money scheme work? It already has – in Iceland. Iceland was a failed financial system, and after they failed they started fresh. They introduced currency controls. Thye let their banks fail. They provided support for their poor. They did not introduce austerity measures. Four years later, Iceland is enjoying recovery and prosperity. Iceland's president summed it up nicely: “ Why do we consider the banks to be the holy churches of the modern economy? The theory that you have to bail out banks is a theory about bankers enjoying for their own profit the success and then letting ordinary people bear the failure through taxes and austerity, and people in enlightened democracies are not going to accept that in the long run.”

Maybe Turner's speech is the “emperor's new clothes moment, where people realize the financial rulers are suffering from a delusion that doesn't have to be humored. Turner argues that a virtually surefire method of stimulating economic activity exists today and that politicians and central bankers can no longer treat it as taboo: Newly created money should be handed out to the citizens or governments of countries that are mired in stagnation and such monetary financing of tax cuts or government spending should continue until economic activity revives. The idea that the government can't provide enough money to keep the economy humming along on the road to prosperity is as absurd as the idea that a carpenter doesn't have enough inches to build a house.

We need a permanent money supply, and the money must come from somewhere. It is the right and duty of government to provide a money supply that is adequate and sustainable. It is also the duty of government to provide the public services necessary for a secure and prosperous life for its people. As Thomas Edison observed in the 1920s, if the government can issue a dollar bond, it can issue a dollar bill. Both are backed by "the full faith and credit of the United States." The government can pay for all the services its people need and eliminate budget crises permanently, simply by issuing the dollars to pay for them, debt-free and interest-free.

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