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Why Helicopter Money Can’t Save Us: We’ve Already Been Doing It For 8 Years
Why Helicopter Money Can’t Save Us: We’ve Already Been Doing It For 8 Years
For those unfamiliar, it’s billed as a kind of last Keynesian resort when ZIRP, NIRP, and QE have all failed to boost aggregate demand and juice inflation.
For instance, HSBC said the following late last month: “If central banks do not achieve their medium-term inflation targets through NIRP, they may have to adopt other policy measures: looser fiscal policy and even helicopter money are possible in scenarios beyond QE and negative rates.”
And here’s Citi’s Willem Buiter from Septemeber: “Helicopter money drops would be the best instrument to tackle a downturn in all DMs.”
So what exactly is this “helicopter money” that is supposed to provide a lifeline when all of central banks’ other forays into unconventional policy have demonstrably failed? Well, here’s Buiter to explain how it works in theory (this is the China example, but it’s the same concept everywhere else):
Now whether it’s “fiscally, financially and macro-economically prudent in current circumstances,” (or any circumstances for that matter) is certainly questionable, but what’s not questionable is that it is indeed feasible.
How do we know? Because we’ve been doing it for 8 long years.
If you think about what Buiter says above, it’s simply deficit financing. The government prints one paper liability and buys it from itself with another paper liability that the government also prints.
Sound familiar? It’s called QE.
The first-best would be for the central government to issue bonds to fund this fiscal stimulus and for the PBOC to buy them and either hold them forever or cancel them, with the PBOC monetizing these Treasury bond purchases. Such a ‘helicopter money drop’ is fiscally, financially and macro-economically prudent in current circumstances, with inflation well below target and likely to fall further.
…click on the above link to read the rest of the article…
Deutsche Bank Discovers Kuroda’s NIRP Paradox
Deutsche Bank Discovers Kuroda’s NIRP Paradox
Don’t believe us, just have a look at these three charts:
But how could that be? By all accounts – or, should we say, by all conventional Keynesian/ textbook accounts – negative rates should force people out of savings and into higher yielding vehicles or else into goods and services which “rational” actors will assume they should buy now before they get more expensive in the future as inflation rises or at least before the money they’re sitting on now yields less than it currently is.
Well inflation never rose for a variety of reasons (not the least of which was that QE and ZIRP actually contributed to the global disinflationary impulse) and nothing will incentivize savers to keep their money in the bank like the expectation of deflation.
Well, almost nothing. There’s also this (again, from BofA): “Ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain.”
Why that’s “perverse,” we’re not entirely sure. Fixed income yields nothing, and rates on savings accounts are nothing. Which means if you’re worried about your nest egg and aren’t keen on chasing the stock bubble higher or buying bonds in hopes that capital appreciation will make up for rock-bottom coupons (i.e. chasing the bond bubble), then as Gene Wilder would say, “you get nothing.” And that makes you nervous if you’re thinking about retirement. And nervous people don’t spend. Nervous people save.
Deutsche Bank has figured out this very same dynamic. In a note out Friday, the bank remarks that declining rates have generally managed to bring consumption forward.
…click on the above link to read the rest of the article…
The Market Has Lost Faith In Our Board, Bank Of International Settlements Laments
The Market Has Lost Faith In Our Board, Bank Of International Settlements Laments
The BIS’ Claudio Borio was vindicated in January – and it was a long time coming.
When last we checked in with Claudio, it was December and the bank’s Head of the Monetary and Economic Department was busy explaining what may befall $3.2 trillion in EM USD debt in the persistently strong dollar environment. “The stock of dollar-denominated debt, which has roughly doubled since early 2009 to over $3 trillion, is still there [and] in fact, its value in domestic currency terms has grown in line with the US dollar’s appreciation, weighing on financial conditions and weakening balance sheets,” he warned.
We also laid out the progression of Borio’s most recent warnings as delineated in the banks’ widely-read, if on occasion perfunctory, quarterly reports. Below, is a brief review.
From 2014, warning about the market’s dependence on central bank omnipotence:
To my mind, these events underline the fragility – dare I say growing fragility? – hidden beneath the markets’ buoyancy. Small pieces of news can generate outsize effects. This, in turn, can amplify mood swings. And it would be imprudent to ignore that markets did not fully stabilise by themselves. Once again, on the heels of the turbulence, major central banks made soothing statements, suggesting that they might delay normalisation in light of evolving macroeconomic conditions. Recent events, if anything, have highlighted once more the degree to which markets are relying on central banks: the markets’ buoyancy hinges on central banks’ every word and deed.
From March of 2015, speaking out about the dangers of increasingly illiquid secondary markets for corporate bonds:
As a result, market liquidity may increasingly come to depend on the portfolio allocation decisions of only a few large institutions. And, more broadly, investors may find that liquidating positions proves more difficult than expected, particularly in the context of an adverse shift in market sentiment.
…click on the above link to read the rest of the article…
Kuroda’s NIRP Backlash – Japanese Interbank Lending Crashes
Kuroda’s NIRP Backlash – Japanese Interbank Lending Crashes
Not only has the Yen strengthened and stocks collapsed since BoJ’s Kuroda descended into NIRP lunacy but, in a dramatic shift that threatens the entire transmission mechanism of negative-rate stimulus, Japanese banks (whether fearing counterparty risk or already over-burdened) have almost entirely stopped lending to one another. Confusion reigns everywhere in Japanese markets with short-term interest-rate swap spreads surging and bond market volatility spiking to 3 year highs (dragging gold with it).
As Bloomberg reports,
The outstanding balance of the interbank activity plunged 79 percent to a record low of 4.51 trillion yen ($40 billion) on Feb. 25 since Bank of Japan Governor Haruhiko Kuroda on Jan. 29 announced plans to charge interest on some lenders’ reserves at the monetary authority.
While Kuroda wants to lower the starting point of the yield curve to reduce borrowing costs and spur shift of funds into riskier assets, the interbank rate has fallen only about as far as minus 0.01 percent, above the minus 0.1 percent charged on some BOJ reserves. The swings on bond yields will make it harder for financial institutions to determine how much business risks they can take, weighing on lending in a weak economy even as they are penalized for keeping some of their money at the central bank.
It will take at least another month until the market finds a level where many dealings are settled, as financial institutions face uncertainty over how the new policy affects monthly fund flows, said Izuru Kato, the president of Totan Research Co. in Tokyo.
“Since past patterns don’t apply under the entirely new structure, financial institutions will take a conservative approach until the financing picture is nailed down,” Kato said. “If the funding estimate proves wrong, banks might lose by prematurely lending in negative rates. People are cautious and staying on the sidelines.”
…click on the above link to read the rest of the article…
Ukraine Collapse Is Now Imminent
Ukraine Collapse Is Now Imminent
Two years have passed since Yanukovich was deposed and, as it turns out, another ruthless clan of oligarchs has taken power. No wonder then that Ukraine is heading for a new wave of violence and chaos. Oligarchs are fighting each other, the IMF is pulling out of the country, officials issue laws and regulations only to see them repealed within a day or two by others, and raided European companies are leaving the country after being robbed by the so-called pro-Brussels oligarchic elite.
It was evident from the beginning that the US and NATO-sponsored power transition was doomed to fail. Prime Minister Yatsenyuk made no secret on his personal website about his principal partners, NATO and Victor Pinchuk’s foundation. Victor Pinchuk is a link between the Ukraine corrupt oligarchic establishment and the Western political elite. In 2005, the BBC depicted him as a paragon of Ukraine’s kleptocracy:
“Ukraine’s largest steel mill has been bought by Mittal Steel for $4.8bn (£2.7bn) after an earlier sale was annulled amid corruption allegations.The Kryvorizhstal mill was originally sold to the son-in-law (Mr. Pinchuck) of former President Leonid Kuchma for $800m.
It was one of the scandals that sparked the Orange Revolution and propelled President Viktor Yushchenko into power.”)
Directly after the power transition, European leaders understood that the situation in the Ukraine was unmanageable, which we know from a confidential telephone conversation between Minister Paet (Minister of Foreign Affairs of Estonia) and Mrs. Ashton (High Representative of the Union for Foreign Affairs and Security Policy) that became public. Both politicians understood that the Maidan protesters had no trust in the politicians who formed the new coalition. Mr Paet said, “there is now stronger and stronger understanding that behind snipers it was not Yanukovich, but it was somebody from the new coalition.”
…click on the above link to read the rest of the article…
Chesapeake’s AIG Moment: Energy Giant Faces $1 Billion In Collateral Calls
Chesapeake’s AIG Moment: Energy Giant Faces $1 Billion In Collateral Calls
And then, just two days later, in an unexpected turn, Chesapeake announced that contrary to public opinion, the troubled energy giant “is planning to pay $500 million of debt maturing in March, using a combination of cash on hand and other liquidity that may include its credit line, according to a person with knowledge of the matter.” The issue referenced was precisely the bond that was our “trade of the year.”
To be sure, the bond promptly surged, even as the stock priced tumbled, on what was seen as a very bondholder-friendly action (and thus to the detriment of shareholders) and hit a price of 95 cents while the stock tumbled by 15%, generating a 30% return for anyone who had decided to go along. At that moment we urged anyone in the trade to take their profits and go home, taking a few weeks, or the rest of 2016, off.
A quick update since then shows that those same bonds are currently trading effectively at par (99.25 cents)…
… suggesting that the risk of a near-term Chesapeake bankruptcy may be gone for now.
But is it truly off the table?
Sadly, we think that despite the brief hiccup in optimism, CHK’s troubles are about to get worse, even if this particular bond is ultimately repaid, for one simple reason: in its 10-K filed yesterday, Chesapeake announced that it has just reached its own “AIG moment.”
…click on the above link to read the rest of the article…
According To Morgan Stanley This Is The Biggest Threat To Deutsche Bank’s Survival
According To Morgan Stanley This Is The Biggest Threat To Deutsche Bank’s Survival
Two weeks ago, on one of the slides in a Morgan Stanley presentation, we found something which we thought was quite disturbing. According to the bank’s head of EMEA research Huw van Steenis, while in Davos, he sat “next to someone in policy circles who argued that we should move quickly to a cashless economy so that we could introduce negative rates well below 1% – as they were concerned that Larry Summers’ secular stagnation was indeed playing out and we would be stuck with negative rates for a decade in Europe. They felt below (1.5)% depositors would start to hoard notes, leading to yet further complexities for monetary policy.”
As it turns out, just like Deutsche Bank – which first warned about the dire consequences of NIRP to Europe’s banks – Morgan Stanley is likewise “concerned” and for good reason.
With the ECB set to unveil its next set of unconventional measures during its next meeting on March 10 among which almost certainly even more negative rates (for the simple reason that a vast amount of monetizable govt bonds are trading with a yield below the ECB’s deposit rate floor and are ineligible for purchase) the ECB may cut said rates anywhere between 10bps, 20bps, or even more (thereby sending those same bond yields plunging ever further into negative territory).
As Morgan Stanley warns that any substantial rate cut by the ECB will only make matters worse. As it says, “Beyond a 10-20bp ECB Deposit Rate Cut, We Believe Impacts on Earnings Could Be Exponential.”
…click on the above link to read the rest of the article…
Brazil Cut To Junk By All Three Ratings Agencies After Moody’s Joins The Fray
Brazil Cut To Junk By All Three Ratings Agencies After Moody’s Joins The Fray
S&P had already thrown the country into the junk bin and just six days after our warning, Fitch followed suit.
Between the country’s seemingly intractable political crisis and worsening public finances, the outlook is exceptionally dire and just moments ago, Moody’s cut Brazil to junk as well.
- MOODY’S DOWNGRADES BRAZIL’S ISSUER, BOND RATINGS TO Ba2 W/ A
- BRAZIL’S ISSUER & BOND RATINGS CUT TO Ba2 BY MOODY’S
- DETERIORATING DEBT METRICS WILL RESULT IN A MATERIALLY WEAKER CREDIT PROFILE IN THE COMING YEARS
Watch the BRL and the Bovespa. Things likely won’t be pretty.
Below, find the rationale.
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From Moody’s
Moody’s downgrades Brazil’s issuer and bond ratings to Ba2 with a negative outlook
The downgrade was driven by
- The prospect of further deterioration in Brazil’s debt metrics in a low growth environment, with the government’s debt likely to exceed 80% of GDP within three years; and
- The challenging political dynamics, which will continue to complicate the authorities’ fiscal consolidation efforts and delay structural reforms.
The negative outlook reflects the view that risks are skewed toward an even slower consolidation and recovery, or further shocks emerging, which creates uncertainty over the magnitude of deterioration of Brazil’s debt profile over the rating horizon.
RATIONALE FOR THE DOWNGRADE
Brazil’s credit metrics have deteriorated materially since the Baa3 rating with a stable outlook was assigned in August 2015. That deterioration is expected to continue over the coming three years, given the scale of the shock to the Brazilian economy, the lack of progress made by the government in achieving its fiscal and economic reform objectives and the political dynamics expected to persist over that period.
…click on the above link to read the rest of the article…
NIRP Won’t Work – What Ray Dalio Thinks Central Banks Will Do Next
NIRP Won’t Work – What Ray Dalio Thinks Central Banks Will Do Next
If dropping interest rates to zero was Unorthodox Policy #1 and QE was Unorthodox Policy #2 then it seems very possible Helicopter Money will be Unorthodox Policy #3. Whether this new level of expansionism, with all the hopes and theoretic power it is supposed to hold, can generate growth of the red-hot rather than lukewarm kind remains to be seen.However in so much as it could potentially raise nominal GDP, it may become an increasingly more attractive policy option around a global economy (especially DM) economy that faces many natural and structural growth concerns in the year ahead.Forcing the nominal economy to grow into the problems of the bubble era could be the most realistic policy choice over the remainder of the decade.
And today, the latest in a long line of realists has now come to the same conclusion that the only thing the central planners have left is a money-drop…
Authored by Bridgewater’s Ray Dalio (via ValueWalk.com),
Monetary Policy 1 was via interest rates. Monetary Policy 2 was via quantitative easing. It will be important for policy makers and us as investors to envision what Monetary Policy 3 (MP3) will look like.
While monetary policy in the US/dollar has not fully run its course and lowering interest rates and quantitative easing can still rally markets and boost the economy a bit, the Fed’s ability to stimulate via these tools is weaker than it has ever been. The BoJ’s and ECB’s abilities are even weaker. As a result, central banks will increasingly be “pushing on a string.” Let’s take just a moment to review the mechanics of why and then go on to see what MP3 will look like.
…click on the above link to read the rest of the article…
A Contagious Crisis Of Confidence In Corporate Credit
A Contagious Crisis Of Confidence In Corporate Credit
Credit is not innately good or bad. Simplistically, productive Credit is constructive, while non-productive Credit is inevitably problematic. This crucial distinction tends to be masked throughout the boom period. Worse yet, a prolonged boom in “productive” Credit – surely fueled by some type of underlying monetary disorder – can prove particularly hazardous (to finance and the real economy).
Fundamentally, Credit is unstable. It is self-reinforcing and prone to excess. Credit Bubbles foment destabilizing price distortions, economic maladjustment, wealth redistribution and financial and economic vulnerability. Only through “activist” government intervention and manipulation will protracted Bubbles reach the point of precarious systemic fragility. Government/central bank monetary issuance coupled with market manipulations and liquidity backstops negates the self-adjusting processes that would typically work to restrain Credit and other financial excess (and shorten the Credit cycle).
A multi-decade experiment in unfettered “money” and Credit has encompassed the world. Unique in history, the global financial “system” has operated with essentially no limitations to either the quantity or quality of Credit instruments issued. Over decades this has nurtured unprecedented Credit excess and attendant economic imbalances on a global scale. This historic experiment climaxed with a seven-year period of massive ($12 TN) global central bank “money” creation and market liquidity injections. It is central to my thesis that this experiment has failed and the unwind has commenced.
The U.S. repudiation of the gold standard in 1971 was a critical development. The seventies oil shocks, “stagflation” and the Latin American debt debacle were instrumental. Yet I view the Greenspan Fed’s reaction to the 1987 stock market crash as the defining genesis of today’s fateful global Credit Bubble.
The Fed’s explicit assurances of marketplace liquidity came at a critical juncture for the evolution to market-based finance.
…click on the above link to read the rest of the article…
Peter Pan Is Dead – Japanese Economy Stalls For 6th Time In 6 Years
Peter Pan Is Dead – Japanese Economy Stalls For 6th Time In 6 Years
With 3 of the top 4 forecasters already suggesting Japanese GDP growth would be worse than the median estimate of -0.2% growth, fairy-tales were all they had left… Nearly a year ago, Bank of Japan governor Haruhiko Kuroda described the unlikely inspiration behind Japan’s unprecedented monetary stimulus: Peter Pan.
I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it’.Yes, what we need is a positive attitude and conviction. Indeed, each time central banks have been confronted with a wide range of problems, they have overcome the problems by conceiving new solutions.
And now, Pan is dead… this is the 6th negative GDP growth period since 2010… printing a 0.4% QoQ drop against the -0.2% growth expectation…
This is the biggest SAAR GDP drop (down 1.4%) since Q2 2014 – right before Kuroda unleashed QQE2 once The Fed had left the money-printing business.
And in case anyone wanted it made any clearer just what an utter farce Abenomics has been…
But it gets much worse…
Private Consumption tumbled more than expected…
- *JAPAN 4Q PRIVATE CONSUMPTION FELL 0.8% Q/Q
The biggest drop since Q2 2014.
Of course – if you are an “enabler” or “central planner” this is great news – just a little more NIRP and just a little more QQE and everything will be fine… what a joke!
…click on the above link to read the rest of the article…
637 Rate Cuts And $12.3 Trillion In Global QE Later, World Shocked To Find “Quantitative Failure”
637 Rate Cuts And $12.3 Trillion In Global QE Later, World Shocked To Find “Quantitative Failure”
2016 is shaping up to be the year that everyone finally comes to terms with the fact that the monetary emperors truly have no clothes.
To be sure, it’s been a long time coming. For nearly 8 years, market participants and economists convinced themselves that the answer was always “more Keynes.” Global trade still stagnant? Cut rates. Economic growth still stuck in neutral? Buy more assets.
It was almost as if everyone lost sight of the fact that if printing fiat scrip and tinkering with the cost of money were the answers, there would never be any problems. That is, policy makers can always hit ctrl+P and/or move rates around. But in order to resuscitate anemic aggregate demand and revive inflation, you need to tackle the core problems facing the global economy – not paper over them (and we mean “paper over them” in the most literal sense of the term).
Well late last month, central banks officially lost control of the narrative. Kuroda’s move into negative territory reeked of desperation and given the surging JPY and tumbling Japanese stocks, it’s pretty clear that the half-life on central bank easing has fallen dramatically.
And so, as the market wakes up from the punchbowl party with a massive hangover, everyone is suddenly left to contemplate “quantitative failure.” Below, courtesy of BofA’s Michael Hartnett is a bullet point summary of 8 years spent chasing the dragon… and a list of the disappointing results.
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From BofA
Whether the recent tipping point was the Fed hike, negative rates in Europe & Japan, or simply the growing market dislocations and macro misallocation of resources and wealth, the deflationary theme of “Quantitative Failure” is stalking the financial markets. A multi-year period of major policy intervention & “financial repression” is ending with weak economic growth & investors rebelling against QE.
…click on the above link to read the rest of the article…
This Is The NIRP “Doom Loop” That Threatens To Wipeout Banks And The Global Economy
This Is The NIRP “Doom Loop” That Threatens To Wipeout Banks And The Global Economy
Remember the vicious cycle that threatened the entire European banking sector in 2012?
It went something like this: over indebted sovereigns depended on domestic banks to buy their debt, but when yields on that debt spiked, the banks took a hit, inhibiting their ability to fund the sovereign, whose yields would then rise some more, further curtailing banks’ ability to help out, and so on and so forth.
Well don’t look now, but central bankers’ headlong plunge into NIRP-dom has created another “doom loop” whereby negative rates weaken banks whose profits are already crimped by the new regulatory regime, sharply lower revenue from trading, and billions in fines. Weak banks then pull back on lending, thus weakening the economy further and compelling policy makers to take rates even lower in a self-perpetuating death spiral. Meanwhile, bank stocks plunge raising questions about the entire sector’s viability and that, in turn, raises the specter of yet another financial market meltdown.
Below, find the diagram that illustrates this dynamic followed by a bit of color from WSJ:
In a way, the move below zero was a gamble. The theory went like this: Banks would take a hit, but negative rates would get the economy moving. A stronger economy would, in turn, help the banks recover.It appears that wager isn’t working.
The consequences are deeply worrying. Weak banks may now drag the economy down further. And with the economy weak and deflation—a damaging spiral of falling wages and prices—looming, central banks that have gone negative will be loath to turn around and raise rates.
…click on the above link to read the rest of the article…
Kuroda Suggests “No Limit” To More NIRP Measures To Stall Japanese Bond Yields, Stocks, USDJPY Plunge
Kuroda Suggests “No Limit” To More NIRP Measures To Stall Japanese Bond Yields, Stocks, USDJPY Plunge
We’re gonna need more NIRP…
- *JAPAN’S TOPIX INDEX FALLS 3.3% TO 1,404.75 AT MORNING CLOSE
- *JAPAN’S NIKKEI 225 FALLS 3.1% TO 17,194.17 AT MORNING CLOSE
And that is what bonds are implying…
- *JAPAN’S 2-YEAR YIELD FALLS TO RECORD MINUS 0.17%
- *JAPAN’S 10-YEAR BOND YIELD FALLS TO RECORD 0.045%
With the entire curve to 8Y below BoJ’s -10bps level…
And Japanese bank stocks are plunging…
Led by Nomura’s 11%-plus plunge – the most since 2011…
…click on the above link to read the rest of the article…
