Helicopter Money Is Being Misrepresented By Bill Gross and Others

This article was first published by me on Talkmarkets:  http://www.talkmarkets.com/content/bonds/helicopter-money-is-being-misrepresented-by-bill-gross-and-others?post=93526&uid=4798

I am happy that Bill Gross and others are speaking to the issue of helicopter money. It is an important issue if you believe the citizens need a bailout, but more importantly, if you fear negative interest rates for bonds as is happening in Europe. We aren't speaking about negative interest on reserves. That is something different. Negative interest rates on bonds are a function of scarcity of supply and massive demand.

However, helicopter money is being misrepresented by Bill Gross and others as being a form of Quantitative Easing (QE). It is not. That view could very well just be from reading the views of others, creating a snowball effect. And Gross is a bond manager, after all. He thinks bonds. 

Real helicopter money is a payment to people sans the use of treasury bonds. It could be a payment for infrastructure but that is not the proponents' main goal for HM. No, HM is simply a payment of base money, created out of nothing, to people in society in equal measure. It is useful in a deflationary environment. The money stays in circulation but there is a short window where payments are actually made.

QE is not involved in pure helicopter money plans. QE is the taking of bonds out of circulation and trading them to banks for excess reserves. That is not helicopter money. We have not done helicopter money in a QE environment. Bill Gross says we have been doing helicopter money for 6 years in the form of QE.

I assume his view of excess reserves created in QE, after reading his article that appeared at Zero Hedge and elsewhere, would just be funneled to the people or for infrastructure instead of to the banks. But again, real helicopter money has to be given a chance to work. I will explain why QE bond swapping for created money will not give HM a chance at all. Bottom line, we don't want more of this in the HM process:

Also, Bill Gross says that the payment to people would be permanent. But the HM purists like Eric  Lonergan say it would be a payment in a window of 12 to 18 months, or Friedman said, one time, which would cause the money to circulate permanently. This is not what Bill Gross said in the Zero Hedge article.  He wants funding to families to be permanent. That could cause problems from a purist point of view.

I have to add that it is clear that Gross is concerned with negative yields. That is a good start for future discussions.

So, what is the big deal, bonds or no bonds? The big deal is that treasury bonds are already in massive demand, by derivatives clearing houses and other people. The demand is pushing bond yields toward zero. Breaking zero would cause massive problems for insurance companies and others. The whole point of helicopter money is to avoid going to the negative with long bonds. Bill Gross's concept would not prevent the slide toward negative. Bonds would be more scarce than ever. 

The cynic in me says the banks want a piece of this action, and want to couch helicopter money in the guise of QE. I hope they do not control the implementation of the concept! As for Gross and others, it could be that they have simply been reading Kocherlakota and aren't aware of how real helicopter money works since he doesn't know how it works. I wrote about Kocherlakota and real HM:

1. I checked with Mr Lonergan prior to writing this article, and he has confirmed that HM does not involve the issuance of treasury bonds as collateral. Former Fed president Narayana Kocherlakota always speaks of treasury bonds being issued for the purpose of spreading HM. But according to Lonergan, Kocherlakota is simply not correct in his analysis of what HM is. This is not to say there are laws that need to be changed from nation to nation to make this process work. But the issuance of treasury bonds is just QE again, but for the people. Helicopter money is much more powerful than QE! It is an alternative to QE.

I leave it to the economists to figure out whether a pure helicopter money scheme will result in a rise of yield on long bonds, freeing us from the zero bound and even freeing us from potential cashlessness (cashless societies). However, I do know that doing the process as QE, with bonds traded for excess reserves, is a recipe for failure in that regard. The whole purpose of HM is to stop negative bond yields from happening. 

Now, it may be necessary to ban bonds for use as collateral in the derivatives clearing houses, in order to break the massive demand. But I don't hear much about that being proposed. What I do hear is a lot of talk about helicopter money, and we should at least get that discussion correct. When Bill Gross speaks, people listen. I just hope they are listening to something that could help our financial system, not just more of the same which evidences diminishing returns and a greater gulf between the 1 percent and the rest of the nation.


Popular posts from this blog

Learn Economics

The Unholy Alliance of Big Banking, Neocons, Big Media and Israel

John Mauldin Discusses What Could Go Wrong