The dominant market mover this week has been the belief that Japan will throw the ultimate monetary “Hail Mary” by printing money, also referred to as “Helicopter Money.” This chatter arose after it was noted that Ben Bernanke had been in Japan talking to Bank of Japan (BOJ) and Ministry of Finance (MOF) officials about helicopter money. To me, helicopter money is like the nuclear option, and Mr. Bernanke is transfixed with the idea. He reminds me of the infamous bomb-happy character, Dr. Strangelove, from Stanley Kubrick’s brilliant Cold War farce, Doctor Strangelove: Or, How I Learned to Stop Worrying and Love the Bomb.
Since last Friday, the Japanese Yen has depreciated 5.5% against the U.S. Dollar, the Nikkei Equity Index has risen 9.2%, the S&P 500 set new highs, and 10-year Treasury has increased 21 basis points in yield. Risk markets are greeting the talk of this potential next monetary policy step as if it were the elixir the world has been waiting for since 2008. This latest development has markets at a crossroads.
Last week, it looked like the world’s bond markets were in a race to see who could post the most negative yields. I really thought we would be at 1.32% on the 10-year Treasury note today. Instead we are at 1.59! Right now, helicopter money is just a well-developed rumor. If it doesn’t happen, I think risk markets turn on a dime and crash while bonds get their rally caps back on. Even more frightening to me is the outcome if Helicopter Money happens—which I think it can have long-lasting catastrophic consequences.
It frightens me that one of the mightiest industrial nations in the world may have decided that their only option is to print money; a strategy that history tells us is usually followed by hyper-inflation and utter financial and societal devastation. The last industrialized country to do this on a mass scale was, of course, Germany.
As our history books tell us, the post-World War One German government (Weimar Republic) printed massive amounts of their paper currency to buy gold certificates (Gold Marks) in order to pay the British and the French staggering war reparations. The reparations were impossible to repay and the Germans, with literally a gun to their heads, just kept printing the only thing they had, paper money, to pay for the Gold Marks until their paper currency became worthless. Runaway inflation destroyed the country and in the aftermath, nearly destroyed the world.
Now, former Federal Reserve Chairman Ben Bernanke goes to Tokyo to tell the Japanese how wonderful this monetary policy option is. Up until now, major central banks have been using the policy of quantitative easing. Central banks, like the Fed, have bought assets from (including government bonds) banks to collapse yields in relatively risk-free credit assets to lower strategic rates (like home mortgage rates), and push investors into riskier assets to inflate their value. The money the Fed paid the banks for assets stays at the Fed where it earns interest. At some point, the banks will want this money (or a higher rate on their cash), but that is a whole other kettle of fish that will be a problem to solve down the road.
What Mr. Bernanke proposes would work like this:
The Japanese MOF would issue perpetual debt at a zero interest rate.
The BOJ would buy this debt by creating Yen and giving it to the MOF.
The MOF, in turn, would take the money and put it into the economy, maybe even give it directly to Japanese citizens.
The central bank funds fiscal stimulus by printing money.
Right now, the talk is that this program, if enacted, would be about 10 trillion Yen, or about $96 billion. That is a big number for stimulus but not a currency-destroying number. However, once the flood gate is opened, who is to say that it should be shut? What if it is deemed “partially successful?” Maybe they do another 10 trillion Yen. Ten trillion here and ten trillion there, and pretty soon, you’re talking about real money! The question is, will this really happen? It is an important question because if it happens, it can be a catastrophic mistake. However if it doesn’t happen, then the tremendous rally we have had in risk assets the past week reverses itself, and we are left to think about the effects of BREXIT, the poor state of European banks, the sclerotic growth in Asia, and weakening crude oil prices. Between now and July 29, when the BOJ meets, all it is going to take is somebody like BOJ Governor Kuroda to say, “No” for the reversal to happen.
In Japan, where about 35% of the population is over 60 and about 12% is over 75, this is a policy that risks destroying the savings of a major chunk of the population—a population that does not have the ability to earn back their money because they can’t work anymore. Is a politician or a central banker going to really take that risk given what they know about the policy’s past experiences? The specter of a bowl of soup costing 10,000 Yen is pretty powerful. Many, like Mr. Bernanke, will say that this time it is different, and that the policy will be limited. However, the reality is, nobody knows that for sure. Moreover, nobody knows if it will even work. Like I noted above, 35% of the Japanese population is over 60 years old, and this demographic is getting worse every year. This giant portion of the population are savers. Of all the major industrialized countries in the world, I would argue that the policy of Helicopter Money would have the least chance of success in Japan because of its demographics.
My feelings are that the Japanese are going to find this policy just too risky and pass on Mr. Bernanke’s advice. This will result in the better of the two possible outcomes: risk markets reverse back down and we experience a strong flight to quality rally in Treasuries.
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