- Trump And The End Of NATO?
Submitted by Finian Cunningham via Strategic-Culture.org,
If Donald Trump is elected US president it will spell the end of the North Atlantic Treaty Organization. At least, that’s how a phalanx of US foreign policy pundits and establishment figures see it. Trump once again caused uproar recently with comments that were viewed as undermining a «cornerstone» of US foreign policy since the Second World War.
Ahead of accepting official nomination as the Republican party presidential candidate, the billionaire property magnate told the New York Times in an interview that, if elected, he would not automatically deploy American military forces to defend another member of NATO if it were attacked.
As the NYT noted Trump’s conditionality regarding NATO was the first time any senior American politician has uttered such a radical change in policy. It overturns «American cornerstone policy of the past 70 years».
Trump was asked whether he would defend Eastern European countries if they were attacked by Russia.
(Hypothetical, propagandistic nonsense, but let’s bear with the argument for the underlying logic that it exposes.)
Trump did not give the customary automatic, unconditional «yes» response. Rather, he said he would have to first review whether these countries had fulfilled their «obligations to us». If they had, then, he said, US forces would defend. If they hadn’t lived up to past financial commitments to NATO, then the inference was that a would-be President Trump would not order troops to defend.
The reaction to Trump’s comments was explosive. NATO’s civilian chief, Jens Stoltenberg, was evidently perplexed by Trump’s equivocal attitude. «Solidarity among allies is a key value for NATO», said the former Norwegian prime minister. «This is good for European security and good for US security. We defend one another».
Stoltenberg was just one of the many pro-NATO figures on both sides of the Atlantic who stampeded to slam Trump for his comments.
The rightwing American Enterprise Institute, the Council on Foreign Relations, and senior foreign policy makers within the Republican and Democrat parties all unanimously berated Trump over his views on NATO. Estonian and Latvian political leaders also expressed deep anxiety on what they saw as a withdrawal by the US from Europe’s security.
Reuters reported a joint letter from a US bi-partisan group of «national security» experts who condemned Trump’s «inflammatory remarks» for not representing the «core interests» of the United States.
«The strength of our alliances is at the core of those interests», said the group. «The United States must uphold the North Atlantic Treaty Organization’s commitments to all of our allies, including Poland, Estonia, Latvia and Lithuania».
Reuters also quoted a former US ambassador to the alliance as saying that Trump’s policy means: «It’s the end of NATO».
Robert Hunter, who was NATO envoy under President Bill Clinton, added: «The essence of NATO, more than any other single factor, is the commitment of the United States of America to the security of the other 27 members».
The Los Angeles Times quoted former NATO supreme commander, US General Wesley Clark, as saying that Trump’s stance «undercuts NATO’s deterrence in Europe». Clark said that the comments showed that Trump has a fundamental misunderstanding of how the alliance works. «It will mean the end of the European Union and the collapse of the US’s largest trading partner».
The former NATO military chief also made the snide comment that Russian leader Vladimir Putin would be «happy» with Trump’s shift in defense policy. As did Hillary Clinton’s senior policy advisor, Jake Sullivan, who made the inane assertion that «Putin would be rooting for Trump» to win the November presidential election.
It is not the first time that Donald Trump has shown an irreverent disregard for NATO and other military partnerships which have been the hallmark of US foreign policy since World War Two. Previously, during the Republican primaries in March, the presidential contender told the Washington Post he would withdraw US troops from Japan, South Korea and the Middle East if regional allies did not shoulder more of the defense burden in terms of boosting financial contributions.
Trump says that his view of drawing down overseas American military forces is part of his «America First» policy. He told the New York Times this policy means: «We are going to take care of this country first before we worry about everyone else in the world».
In a certain sense, Trump’s worldview is laudable. Given the immense challenges for fixing the US economy, impoverished communities, post-industrial unemployment and crumbling infrastructure, of course it does not make sense for the US to maintain over 1,000 military bases overseas in over 100 countries.
And, as Trump has pointed out, it is the US that pays the lion’s share of the budget for its military partnerships. In the 28-member NATO alliance, the US pays 70-75 per cent of the entire budget.
But here is where Trump gets it fundamentally wrong. His premise of the United States functioning as a benevolent protector is misplaced. If that were the case then, yes, Trump’s point about the arrangement being «unfair» would be valid.
However, NATO and the US’s other military umbrellas in Asia-Pacific and the Middle East, are not motivated primarily about maintaining security and peace. These military pacts are all about providing the US with a political, legal and moral rationale for intervening its forces in key geopolitical regions. The massive expenditure by the US on military alliances is really all about maintaining Washington’s hegemony over allies and perceived enemies alike. The reality is that America’s «defense» pacts are more a source of relentless tensions and conflicts. Europe and the South China Sea are testimony to that if we disabuse the notional pretensions otherwise.
In all the heated reaction to Trump’s latest comments on NATO the over-riding assumption is that the United States is a force for good, law and order and peace.
Under the headline «Trump NATO plan would be sharp break with decades-long US policy», this Reuters reportage belies the false indoctrination of what US and NATO’s purpose is actually about. It reports: «Republican foreign policy veterans and outside experts warned that the suggestion by Republican presidential nominee Donald Trump that he might abandon NATO’s pledge to automatically defend all alliance members could destroy an organization that has helped keep the peace for 66 years and could invite Russian aggression».
Really? Maintaining peace for 66 years? Not if you live in former Yugoslavia, Afghanistan, Iraq, Libya, or Ukraine and Syria where NATO powers have been covertly orchestrating and sponsoring conflicts.
Also note the unquestioned insinuation by Reuters that without NATO that would «invite Russian aggression».
If we return to the original question posed by the New York Times, which sparked the flurry of pro-NATO reaction, the newspaper put it to Trump like this:
«Asked about Russia’s threatening activities, which have unnerved the small Baltic States that are among the more recent entrants into NATO, Mr Trump said that if Russia attacked them, he would decide whether to come to their aid only after reviewing if those nations have fulfilled their obligations to us».
The NY Times, like so many NATO advocates who went apoplectic over Trump, is constructing its argument on an entirely false and illusory premise of «Russia’s threatening activities».
Unfortunately, it seems, Trump bought into this false premise by answering the question, even though his conditional answer has set off a firestorm among NATO and Western foreign policy establishments. Can you imagine the reaction if he had, instead, rebutted the false assertion about there even being Russian aggression?
But this fabrication of «Russian threat» is an essential part of the wider fabrication about what the US-led NATO alliance is really functioning for. It is not about defending «the free world» from Russian or Soviet «aggression», or, for that matter, from Iranian, Chinese, North Korean, or Islamic terrorist threats. In short, NATO and US military «protection» has got nothing to do with defense and peace. It is about protecting American corporate profits and hegemony.
Ever since its inception in 1949 by the US under President Truman, NATO is a construct that serves to project American presence and power around the world, as well as propping up its taxpayer-subsidized military-industrial complex. The most geopolitically vital theatre is Europe, where the European nations must be kept divided from any form of normal political and economic relations with Russia. If that were to happen, American hegemonic power, as we know it, is over. That’s what the alarmism among the NATO advocates over Trump is really about.
Trump’s declared aim of withdrawing US forces from overseas and of cutting down NATO is admirable, even if his reasoning is faulty and imbued with false notions of American benevolence.
If he were to implement such policies, then indeed the American facade of NATO might well collapse. Which would be an immeasurably good thing for restoring peaceful international relations, especially with regard to Europe and Russia, despite what the reactionary, rightwing Russophobic European states might say.
But here’s the thing. Trump does not seem to understand how deeply important NATO or US militarism elsewhere around the globe are to American hegemony under its corporate capitalist system. If and when he does actually try to implement his policy, he will encounter formidable forces that he probably isn’t aware of yet.
Without a massive popular mobilization, Trump will not be allowed to implement such a challenge to the foundational premise of modern American power. The US military-industrial-intelligence complex will see to that.
The last American president who tried to rein in the corporate power of US militarism was John F Kennedy. He was assassinated on November 22, 1963, in broad daylight by the CIA-Pentagon and their contract killers. And for 53 years, the entire American media and law enforcement establishments have brazenly covered up that shocking truth in the fashion of a «ministry of truth».
Potentially, Trump’s stance on NATO is damaging to the military alliance, and could even precipitate a terminal decline. That is why the reaction to his comments has been so fierce, and is also why he won’t be allowed to get away with such a policy if he is elected.
This is not meant, however, to sound defeatist. Of course, US militarism and its war-mongering imperialist foreign policy could be overturned. American hegemony is not divinely ordained. But such a radical, fundamental change in direction will require a massive popular movement among ordinary Americans. It will not be achieved on the basis of one fiery politician’s words.
- The Law Of The Jungle Is Far Superior To The Ideology Of Globalism
Submitted by Brandon Smith via Alt-Market.com,
In 1991 George Bush Sr., in at least two separate speeches, announced an active geopolitical endgame for global stability; something he called the “New World Order.” This was not the first time the concept of the NWO had been uttered by a prominent figure. Fabian socialist H.G. Welles wrote an entire book on the ideology decades before, in 1940, entitled 'The New World Order', and even scripted a thinly veiled propaganda film on the rise of globalism titled 'Things To Come'. The core of this ideology is the institution of global governance and the erasure of sovereign nation states, ostensibly in order to end the persistent threat of world war.
It all sounds very noble on the surface, but there is much more to total globalization that the elites do not discuss very openly or very often.
A key quote from Bush’s White House speech to the nation on the eve of Operation Desert Storm in Iraq explains much behind the NWO concept:
“We have before us the opportunity to forge for ourselves and for future generations a new world order — a world where the rule of law, not the law of the jungle, governs the conduct of nations. When we are successful — and we will be — we have a real chance at this new world order, an order in which a credible United Nations can use its peacekeeping role to fulfill the promise and vision of the U.N.’s founders.”
The questions are, what did he mean by the “rule of law,” and what did he mean by the “law of the jungle?” As Bush clarifies further, the “rule of law” in his mind is the law as enforced by a globalist governing body (i.e. the UN). The “law of the jungle” would invariably be everything that represents the opposite of globalism (i.e. wild and unshackled sovereignty).
The "law of the jungle" sounds harsh and unforgiving, and it is, for people who do not pursue greater imperatives and who do not work hard to reach their ultimate potential. This idea is often misconstrued as "fascist" in its origins. That is to say, people commonly assume the law of the jungle is merely the subjugation of the weak by the strong. This is how the globalists WANT you to view sovereignty, national or tribal identity, individualism, etc.; they want you to see these principles as akin to savagery.
In truth, it is the elites that promote savagery as the core of globalism, though it is to be sure a highly sterilized and scientific form of savagery. Their "rule of law" is entirely arbitrary – it is not based in the light of conscience, but on darker desires of artificial advantage for the ruling class and the oppression of everyone else. A better interpretation of the law of the jungle would be that it is a more colorful description of "natural law", the inborn right of self determination guided by inherent conscience. Under natural law, bureaucratic governance serves little purpose. It becomes obsolete.
While the law of the jungle is not easy or carefree or eternally "safe", I think there are many virtues to a “natural”, unfettered and decentralized way of life far above the mindless homogenization and collectivism of the globalist ideal.
Here are just a few examples on why humanity would be much better off living wild and free rather than living an inhibited and micromanaged existence under a global authority.
Surviving In The Jungle Requires Strength And Intelligence
A shallow interpretation of the law of the jungle would argue that “only the strong survive.” Collectivists would claim that this is unfair to the weak and ultimately barbaric in principle. I disagree. The assumption these people make is that the “weak” cannot improve their circumstances and therefore require constant babysitting by a central authority. However, if you actually allow people to be challenged rather than coddled, it can be surprising how strong they become.
Globalism destroys the environmental conditions that inspire excellence and instead rewards and protects mediocrity. Take for example the problems regarding “too big to fail” banks; these institutions are really failures in every respect and, like wounded gazelles, should be given a quick death. But under the theory of globalization the strategy has (so far) been to keep these failures limping along. In other words, the incentive for success has been undermined and weakness has been rewarded.
In this way, not just in the business world but also in the social world, globalism encourages people to accomplish as little as possible and comforts them with promises of being forever nurtured by the global nanny state. If this kind of world becomes an absolute, society will decay and revert to something subhuman. All evolutionary progress will be lost.
Surviving In The Jungle Requires Merit
You have to be useful in the jungle; you have to produce, repair or teach something truly valuable. You have to build. You have to innovate. You have to invent. You have put in the effort to take control of your destiny. You have to prove your merit if you want to thrive. Under globalism, none of this behavior is really necessary or rewarded.
One of the early phases of collectivism, as it establishes its control base, is to forcefully “equalize” all existing elements. This means that collectivist societies often oppress the naturally successful and debase a population until they all meet the same standards of the lowest common denominator.
The small but vocal movement of social justice cultists in the West is a perfect example of the collectivist narrative inherent in globalism. If any movement embodies anti-merit, it is the social justice warriors.
The social justice presumption of life is that all human beings must be treated as if they have merit, and this is often based on their level of victim status rather than their accomplishments. For example, in my article “Why Conscripting Women Into Combat Will Result In Cultural Disaster,” I outlined the outright progressive dismantling of U.S. military training standards in order to open the door for far weaker females to enter active combat units. Superior merit is being systematically removed from the military in order to make way for homogenization based on mediocrity. And while the law of the jungle does not call for a standing military, the fact remains that the loss of merit will invariably lead to a weaker military overall.
I have even seen SJW men argue that they must promote the lowest common denominator under movements like feminism because in a culture based on merit, they personally would have no chance at survival. They claim they are too weak to undertake traditional male roles of production and protection and thus opt for the laziness and safety of the collective rather than bettering themselves. In the jungle, the willfully useless would be quickly eaten, or they would die simply due to their own stupidity and sloth; and I have to say, I’m not so sure that’s a bad thing.
When you give the least successful people the keys to the foundation of your society you discourage the truly successful from pursuing further excellence. The goal for a person who really wants to make their way in such a world would then be to gain as much victim status as possible in order to get the most rewards. Merit becomes superfluous.
Under globalism, this SJW nightmare would achieve world-wide recognition and political promotion.
Survival In The Jungle Requires The Will For Self Defense
The globalist ideal is rooted in pacifism. That is to say aggressive defense by the average individual is treated as either unscrupulous or futile. Why learn how to protect your own life and the lives of others when you can keep your hands clean and have the establishment do it for you? Why not support global governance, end the law of the jungle and put an armed sentry and surveillance camera on every street corner to ward off potential predators? Why not trade all self determination for the promise of endless comfort and a carefree existence?
The problem is, as we have seen in numerous instances in highly self-defense-restricted environments in Europe, the state cannot and will never be able to fulfill its empty promises of constant protection. At bottom, the only promise the authorities can keep is that they will quickly clean up the mess left behind by your corpse after an attack has already occurred. And, as we have seen in other instances in the U.S., the authorities are sometimes also the assailants.
In the jungle, there are no pacifists. They are all dead, or they have converted to a self defense mindset. Pacifists therefore need a collectivist herd to blend into so that they can hide, or so that the guy next to them can be eaten while they make their escape.
Globalism requires the dilution of an actively vigilant population because the philosophy of self defense leads naturally to an appreciation for individual action. Centralized government cannot take control of a citizenry that has the will to strike back on its own against predators.
Anyone who promotes a pacifist response is merely aiding the predators, and this includes people who promote a pacifist response towards predatory governments. If the average person lived by the law of the jungle rather than waiting for a “civilized” authority to protect them or parcel out the freedoms they were born with as if they were privileges, predatory governments would no longer exist.
The Law Of The Jungle Requires Freedom In All Things
You cannot act in the jungle if you are restricted by bureaucracy and collectivist niceties. And if you cannot act freely in the jungle then you will die in the jungle. Therefore, the jungle and the globalist system are mutually exclusive environments.
This does not mean that in the jungle there are no consequences for taking undue actions that harm others. As in the Libertarian concept of the non-aggression principle, it is far better to leave others alone to pursue their own prosperity, first because it is the right thing to do, but also because they may have means of self defense just as you do. To try to control the lives of others, the thoughts of others, the language of others, the personal associations of others, the property rights of others, is to elicit a justified backlash and the loss of your own life.
To be a predator in the jungle is not without ample risk, most animals will defend themselves when cornered and an injured predator could end up a dead predator. But to be a predator in a globalist world populated with unarmed sheep means there is little risk, especially when you are sanctioned by the establishment.
The jungle is a place where meaningful progress serving the individual is essential, for even a jungle tribe is only as strong as the individuals that make up its ranks. The globalist world is a place where meaningful progress is stifled and strong individuals are treated as a threat. Globalism requires a collectivist machine, a hive mind in which the individual is only a piston in the apparatus. Globalism displaces creative thinking in the name of efficiency, and murders innovation.
A globalist society would be a static society, frozen in an endless cycle of conformity and sameness. The only beneficiaries would be those at the top of the pyramid, who, as in all collectivist ventures, reap the majority of the rewards because they are the people who get to redistribute the wealth of production in any manner they see fit.
In the jungle, these redistributors would be seen as useless middlemen, parasitic gatekeepers standing in the way of production and prosperity, drinking their share of blood from every transaction and every invention; stealing earned wealth from the successful in order to feed another army of people they have encouraged to also become parasites through the ideology of anti-merit.
In the jungle, in a free world, people would immediately question why these middlemen posing as authority figures and financiers should exist at all? What purpose do they serve? They certainly have no merit. They are not successful because they are better than anyone else at anything necessary. They are not hunter gatherers, they are not producers, they are not defenders, they are not teachers, and they are not fixers. They feed off the rest of us but they are not active and honest competitors. They are not lions or tigers or bears. They are vicious scavengers. Carrion feeders or thieves. They are rabid hyenas and jackals looking to nibble a piece at time from us when while we are distracted.
In the jungle, these vermin are often present but certainly not welcome. At any opportunity they are squashed. In this way it is understandable why globalists would be so afraid of the jungle.
- "Short Everything That Guy Has Touched" – San Fran's Lending Standards Put The Last Housing Bubble To Shame
A perfect storm of low interest rates and a booming tech economy, which has pumped out an endless number of tech millionaires rewarded for amazing ideas like the ability to morph one’s face with a squirrel, have culminated in a substantial housing bubble in Silicon Valley and the surrounding areas.
As recently observed here and here, we think this bubble is just about ready to burst. In fact, an overlay of recent housing prices in San Franciso vs. Las Vegas prices during the last cycle look fairly ominous:
Several weeks ago in a post titled “These 2 Forces Will Crush the San Francisco Housing Bubble,” we presented the combination of plateauing employment with an accelerating expansion of housing supply as a nasty combination for home prices in Silicon Valley. That said, we would like to add 1 more “force” to the list which is a return of extremely aggressive lending practices, painfully similar to the previous housing bubble.
As noted in a Bloomberg article today, the $0 down, 30-year, adjustable-rate, jumbo mortgage backed by illiquid stock options in tech start-ups, a loan which the San Francisco Federal Credit Union has coined POPPY, or Proud Ownership Purchase Program for You (because “Steaming Pile of Shit” just didn’t seem appropriate and messaging really is everything when you’re trying to dump loans overseas), has made a huge comeback in Silicon Valley.
As the San Francisco Federal Credit Union pointed out, it’s often not home values that keep people in rentals but rather the inability of potential buyers to come up with a down payment which would be equal to $187,000 on the median home in San Francisco. So they decided to solve that silly little problem with POPPY. To our “surprise”, POPPY has been a huge success and the credit union is sitting on a backlog of $100 million of pre-approved, 30-year, adjustable-rate mortgages just waiting to be funded.
Not wanting to be outdone by their tech brethren, local banks have become very “innovative” in their race to “disrupt” the old-school approach to mortgage lending that requires things like down payments and rigorous credit checks. Per Bloomberg:
At Social Finance, the strategy is about getting in on the ground floor, which it aims to do through its marketing partnerships with 22 companies and a promise of an answer on a loan application within a day to help speed up the home-buying process. SoFi also woos clients with loan officers who fight to help them win bidding wars against cash buyers.
First Republic Bank — which gave Facebook Inc. billionaire Mark Zuckerberg a 1.05% interest-rate mortgage — has opened branches in Facebook and Twitter Inc. headquarters.
As Glenn Kelman, CEO of the brokerage Redfin, concluded “It’s a smart bet to cater to a sector that’s created thousands of millionaires and dozens of billionaires.”
Our thoughts are best summarized by Steve Carroll at the very end of the clip below:
- Bernie Supporters Boo, Chant "No More Wars" As Leon Panetta Pitches Hillary's War Credentials
Former Secretary of Defense Leon Panetta reinforced Hillary Clinton’s position as a warmonger in his speech at the Democratic National Convention tonight. Amid various jabs at Donald Trump, Panetta exclaimed the danger of “withdrawal” of American forces from the world and the apparent need for more status quo interventionism; but the ‘reportedly’ united Democratic convention seemed not to agree. Bernie Sanders’ supporters drowned out Panetta’s claims that Hillary masterminded Bin Laden’s killing with boos and chants of “no more war,” and “lies.”
Having already slammed Donald Trump with regard Russia,
“I just think that’s beyond the pale,” he said to CNN’s Christiane Amanpour. “I think that kind of statement reflects that he is truly not qualified to be president of the United States.”
The former CIA Head then proclaimed falsely that,
“Trump..is asking one of our adversaries to engage in hacking or intelligence efforts against the US to affect our election.”
But it was his reinforcement of Hillary Clinton’s war credentials that appeared to upset the clearly-divided Democratic party the most, as Bernie supporters drowned him out for a few moments with chants of “no more wars” and “lies” amid their booing…
#DemsInPhilly Crowd chanting “No more war” as Fmr Defense Secretary Leon Panetta speaks. Some boo him. @CBSDFW pic.twitter.com/vajUvBISOF
— Jack Fink (@cbs11jack) July 28, 2016
Excerpts from Panetta’s speech:
This president is Hillary Clinton. During my time as CIA Director and Secretary of Defense, Hillary was a strong supporter of our efforts to protect our homeland, decimate al-Qaeda, and bring Osama bin Laden to justice. It was a tough decision to go after bin Laden. In long meetings in the White House Situation Room, we debated that fateful decision.
I presented the intelligence to the President, laying out the risks. And when the President went around the table to the country’s national security leadership, Hillary was clear: We have to go get bin Laden. And our Special Operations Forces did just that. And they sent a clear message to the world that no one attacks America and gets away with it.
Hillary is just as determined to defeat those who threaten us today: ISIS, al-Qaeda, Boko Haram, al-Shabaab. Terrorists who pervert the teachings of Islam to kill innocent people going about their daily lives, people traveling through airports in Brussels and Istanbul, families celebrating on the beachfront in France, men and women shopping in a market in Baghdad, and just this week, an 85-year-old priest whose throat was slit by terrorists who stormed his church during Mass. These murderers must be stopped.
Hillary Clinton is the only candidate who has laid out a comprehensive plan to defeat and destroy ISIS and keep America safe. She is smart. She is principled. She is tough and she is ready. Hillary is the single most experienced and prepared person who has ever run for president.
…
We cannot afford someone who believes America should withdraw from the world, threatens our international treaties, and violates our moral principles.
As The Hill reports, Panetta appeared very flustered as he stood on stage waiting for the chants to end.
The audience starts shouting "no more war" while Leon Panetta speaks #DemsInPhilly https://t.co/TAG0SqRvbP https://t.co/D4wn5MhOFO
— CNN Politics (@CNNPolitics) July 28, 2016
As Panetta continued to speak, the lights were dimmed over the sections of Sanders supporters, an apparent effort to silence them.
But the protesters were undeterred and lit up cell phone flashlights in protest.
The chants undercut a portion of the convention dedicated to promoting Clinton’s national security bonafides.
Retired Rear Adm. John Hutson’s speech was also cut off by chants from the California delegation. But the chants appeared unrelated to his speech, which praised the former secretary of State’s readiness to be president and attacked Trump as reckless on foreign policy.
We have one word: Unity?
- Richard Koo: If Helicopter Money Succeeds, It Will Lead To 1,500% Inflation
After today’s uneventful Fed announcement, all eyes turn to the BOJ where many anticipate some form of “helicopter money” is about to be unveiled in Japan by the world’s most experimental central bank.
However, as Nomura’s Richard Koo warns, central banks may get much more than they bargained for, because helicopter money “probably marks the end of the road for believers in the omnipotence of monetary policy who have continued to press for further accommodation in the midst of a balance sheet recession, when such policies simply cannot work.”
As he continues, believers “have doggedly insisted that it is possible to control inflation because (1) inflation is everywhere and always a monetary phenomenon and (2) central banks control the supply of money. Based on this belief, they have implemented a variety of policies including quantitative easing, negative interest rates, forward guidance, and inflation targeting, each of which has failed to produce expected results. Now they have reached the end of the line, and the signpost reads “Last stop: helicopter money.”
Koo continues to unload on central bankers, slamming their “faith that the economy will pick up if only money is dropped from the sky” that has provided a psychological foundation for economists and policymakers convinced of the efficacy of monetary policy. It also explains why nothing has worked yet. The Nomura strategist then mocks “their belief that dropping money from helicopters would revive the economy that has led them to assume that slightly less extreme policies such as quantitative easing and inflation targeting would also have a positive economic impact (albeit a more modest one).”
This is precisely what we said in March 2009 when the Fed first launched QE, and were mocked. It has now become mainstream.
* * *
We also predicted that the endgame will ultimately be hyperinflation, after an extended period of intermediary steps in which central bankers stumble from one interim, and flawed, “solution” to another, until they finally hit the monetary endgame… which is where we are now.
Koo admits as much by highlighting the paradox of helicopter money (assuming the form it is most likely to be implemented under, i.e., financing of deficits) namely that if and when it is ultimately successful, it will assure hyperinflation. This is how he puts it:
Eventually the private sector will complete its balance sheet repairs and resume borrowing. When that happens, inflation can quickly spiral out of control unless the central bank drains the liquidity it pumped into the market under quantitative easing or helicopter money. For example, excess reserves created by the Fed currently amount to some 15 times the level of statutory reserves.
That implies that if businesses and households were to resume borrowing in earnest, the US money supply could balloon to 15 times its current size, sending inflation as high as 1,500%. The corresponding ratios are 28 times for Japan and Switzerland, five times for the eurozone, and 11 times for the UK.
Once private-sector demand for loans recovers in these countries, confidence in the dollar, euro, and yen will plummet unless the Fed reduces excess reserves to one-fifteenth of their current level, the ECB to one-fifth, and the Bank of Japan to one-twenty-eighth.
So what’s the problem: just soak up reserves, i.e., sell central bank assets?
However, as Koo puts it, “that sort of extreme reduction in reserves will require the central bank to sell the bonds it holds, which would be a nightmare for both the economy and the bond market.“
In short, it would result in a bidless (already illiquid) bond market with yields exploding, and likewise trigger an explosion in inflation as suddenly interest rates go through the roof, countless companies default on their debt, and the value of both debt and credit implode.
* * *
Below we present selected excerpts from Koo’s full “cost-benefit analysis” of helicopter money, and specifically the four forms it could take, and why each of them is ultimately doomed.
1. Dropping money from the sky
A look at the helicopter money debate in Japan and elsewhere shows that the actual policies being discussed can be classified into four main types. The first is helicopter money in the literal sense of dropping money from helicopters. Would this work? In Japan, at least, it would be another complete failure. This is because when the typical Japanese finds a 10,000-yen note lying on the ground, she will turn it in at the nearest police station rather than spend it. Put differently, a helicopter money policy can only work if the people in a country have little sense of right and wrong.
No seller would exchange products for money that fell from the sky
Another critical omission from the argument that helicopter money will resuscitate the economy is that it focuses exclusively on the logic of buyers while ignoring the logic of sellers. Unethical buyers may try to go shopping with money that has fallen from the sky, but there is no reason for sellers to accept such money. Sellers are willing to take money in exchange for goods and services only because the supply of that money is strictly controlled by the central bank. If money starts falling from the sky, sellers will refuse to accept it as payment for their products. If the authorities actually began dropping money from helicopters, shops would either close their doors or demand payment in foreign currency or gold, and the economy would quickly collapse. There is no economy so wretched as one that no longer has a national currency the people trust.
Helicopter money not the ultimate form of monetary accommodation
In light of the above, the argument that monetary policy can be relied upon to boost the economy because helicopter money is the ultimate form of monetary accommodation and always works can be seen to be complete nonsense that ignores the standpoint of sellers. Taking monetary accommodation to those extremes would lead to the economy’s collapse, not its recovery. There is no case in recorded history of an economy without a credible national currency outperforming an economy that has one.
2. Financing government deficits
In response to this criticism, some proponents of helicopter money would probably say that the helicopter money policies now being discussed do not involve actually dropping money from the sky but rather call for direct financing of government fiscal expenditures by the central bank. In this, the second version of helicopter money, the money is supplied in a way that is not immediately visible to ordinary citizens, so it may take time before sellers begin refusing to sell, but the problems that remain are no different from those of quantitative easing.
Financing of fiscal expenditures during balance sheet recession does not stimulate economy
Fiscal stimulus itself can provide a large boost to the economy. But while direct financing by the central bank may increase reserves in the banking system, those reserves will be trapped in the banking system because there are no private-sector borrowers during a balance sheet recession even at zero interest rates. Prime examples include post-1990 Japan and the leading Western economies since 2008. At such times, the “direct” part of the direct financing of fiscal stimulus cannot stimulate the economy or raise inflation any more than the “non-direct” QE. Both growth and inflation have remained at depressed levels in Japan (since 1990) and the West (since 2008) regardless of how accommodative monetary policy has become because the private sector stopped borrowing after the bubble collapse slashed the value of its assets but left its liabilities intact.
Question of how to mop up excess liquidity has not been answered
Eventually the private sector will complete its balance sheet repairs and resume borrowing. When that happens, inflation can quickly spiral out of control unless the central bank drains the liquidity it pumped into the market under quantitative easing or helicopter money. For example, excess reserves created by the Fed currently amount to some 15 times the level of statutory reserves. That implies that if businesses and households were to resume borrowing in earnest, the US money supply could balloon to 15 times its current size, sending inflation as high as 1,500%. The corresponding ratios are 28 times for Japan and Switzerland, five times for the eurozone, and 11 times for the UK. Once private-sector demand for loans recovers in these countries, confidence in the dollar, euro, and yen will plummet unless the Fed reduces excess reserves to one-fifteenth of their current level, the ECB to one-fifth, and the Bank of Japan to one-twenty-eighth.
But that sort of extreme reduction in reserves will require the central bank to sell the bonds it holds, which would be a nightmare for both the economy and the bond market. It would be a different matter if we were talking about future increases in reserves under a helicopter money policy, but the Fed has already created some $2.5trn in excess reserves under quantitative easing, and the BOJ has created ¥250trn, which means the monetary authorities cannot avoid the issue of draining those funds from the market.
3. Government scrip and perpetual zero-coupon bonds
A third version of helicopter money involves government money printing or the replacement of the JGBs held by the BOJ with perpetual zero-coupon bonds. The people proposing these policies hope that fiscal stimulus financed by government scrip or perpetual zero-coupon bonds, which are not viewed as government liabilities, will elicit spending from people who are currently saving because of concerns about the size of the fiscal deficit and the likelihood of future tax increases. Economists refer to this reluctance to spend because of worries about future tax hikes as the Ricardian equivalence. If true, it implies that consumption will increase each time the government raises taxes since higher taxes mean lower deficit in the future. The fact that this phenomenon has never once been observed in the real world suggests it is nothing more than an empty theory.
Moreover, there are serious issues that must be confronted once the economy picks up and the liquidity supplied by the monetary authorities via government scrip or zero-coupon perpetuals must be drained from the system. Perpetual zero-coupon bonds are essentially worthless, which means the BOJ cannot sell them—no one in the private sector would be stupid enough to buy them. That means the only way to mop up the excess reserves created via the issue of perpetual zero-coupon bonds is for the BOJ to ask the MOF to issue equivalent amounts of coupon-bearing bonds. The same would be true when trying to mop up reserves created by government scrip. Once this scrip starts circulating, it becomes part of the monetary base, and draining it from the system will require the government to absorb it by issuing bonds. And in the case of both perpetuals and government scrip, the government that issued the bonds cannot spend the proceeds. If the government spends them, the liquidity that had been mopped up will flow back into the economy again. Those recommending the issuance of government scrip or perpetual zero-coupon bonds say that one advantage of this approach is that it does not lead to an expansion of government liabilities (upon issuance). However, they will become massive government liabilities when the economy eventually recovers and they must be mopped up.
Helicopter money proponents silent on issue of mopping up reserves
In other words, the biggest issue with helicopter money—as with quantitative easing—is the question of how to drain these funds from the system. It becomes clear just how problematic both policies are when the difficulty of draining reserves is taken into account. Yet in all the discussion about helicopter money and quantitative easing in Japan and elsewhere, almost no one has touched on the massive costs involved in mopping up the excess reserves created under these policies. Everyone emphasizes the benefits of these policies when introduced while ignoring that those benefits are small indeed when we examine the costs and benefits over the policy’s lifetime. As one example of this bias, Waseda University professor Masazumi Wakatabe argued in a Nikkei column titled “Easy Economics” that helicopter money is preferable to quantitative easing inasmuch as it enables the government to undertake fiscal stimulus without increasing its liabilities.
I suspect that the helicopter money envisioned by Mr. Wakatabe involves the issuance of government scrip or direct central bank underwriting of perpetual zero-coupon bonds. However, he makes no mention whatsoever of how the liquidity created via these methods will be drained from the system once private-sector demand for loans recovers.
Helicopter money offers no benefits whatsoever over policy’s lifetime
As described above, the only way to mop up liquidity that has been created using these methods is for the government to issue bonds and not spend the proceeds. I think this would be more difficult from both a legal and practical perspective than winding down quantitative easing, which in itself is no easy task. Moreover, the amount of government debt that must ultimately be acquired by the private sector is no different from a case in which the government had issued bonds to fund fiscal stimulus from the outset.
In short, whether fiscal stimulus is funded with government scrip and zero-coupon bonds or with the ordinary issue of government debt, the size of the government’s liabilities will be the same in the end. Helicopter money offers no benefits whatsoever when viewed over the lifetime of the policy, including the eventual need to mop up liquidity.
4. Handing cash directly to consumers
A fourth version of helicopter money involves handing out money directly to consumers, without requiring it to pass through financial institutions. In this scenario, a consumer might open her mailbox one morning to find an envelope from the Bank of Japan containing ¥1mn. While that discovery may bring momentary happiness, I suspect she may feel a chill down her spine once she realizes everyone around her had received similar envelopes. And if such envelopes arrived day after day, the entire country would quickly fall into a panic as people lose all sense of what their currency is worth. Regardless of what buyers might wish to do, sellers would be forced to protect themselves, with stores putting up signs requesting payment in either foreign currency or gold. This is a nightmare scenario.
* * *
Why is helicopter money so popular?
What I find fascinating is why so many pundits in Japan and elsewhere continue to promote policies like quantitative easing and helicopter money while completely ignoring the need to eventually mop up all the liquidity created under these policies. One possibility is that this marks the last stand of the academic economists who have been insisting for the past three decades that monetary policy is the solution to all economic problems. Mr. Wakatabe, for example, declared without irony that “the problem of how to increase nominal GDP always has an answer: helicopter money.” This argument completely ignores sellers’ reactions and the ultimate cost of mopping up excess liquidity. Yet even Mr. Wakatabe acknowledged in the aforementioned Nikkei column that no matter how much money the central bank supplies under quantitative easing, “the money available for people to use will not increase unless financial institutions start lending more.” This statement suggests that the professor has finally realized the shortcomings of monetary policy during a balance sheet recession, something we have been talking about for the last 20 years. And that, in turn, may be why these economists are now leaning in the direction of helicopter money, which could go directly to the households and not depend on financial institutions.
Will private-sector loan demand ever recover?
Another possibility is that these economists are assuming private-sector loan demand will never recover. If that were in fact the case, there would be no need to mop up the liquidity, and consequently no need to worry about the attendant costs. The current economic slump could continue indefinitely if people who had terrible experiences digging themselves out of debt following the asset bubble’s collapse decided they would never again borrow money. In that case there would be no need for the central bank to move quickly to mop up the funds created under quantitative easing and helicopter money. It is extremely difficult to project when the private sector will overcome its debt trauma and resume borrowing, inasmuch as there are few historical instances in which an economy has emerged from a balance sheet recession. But I think it is dangerous to keep quantitative easing and helicopter money policies in place based on the assumption that the current situation will continue forever. After all, success for all policies including helicopter money is defined as a recovery in private-sector demand for loans.
- "Real, Imminent Threat" That Next World War Will Be Initiated By First Strike EMP Weapon
There has been a tremendous amount of technological interchange between North Korea, the Russians, and the Chinese. North Korea has also been working for years in the refinement (development) of its nuclear arsenal, especially in partnership with Pakistan and Iran. In a press conference at the Pentagon on October 24, 2014 reporters were briefed by General Curtis Scaparrotti, the U.S. Military Commander in Korea. This is what the general had to say:
“I believe they [the North Koreans] have the capability to have miniaturized the [nuclear] device at this point, and they have the technology to potentially, actually deliver what they say they have.”
On March 9, 2016, Kim Jong-Un for the first time stated that North Korea had accomplished the miniaturization of nuclear warheads that are compatible with ICBM’s. Admiral William Gortney, Commander of US NORTHCOM was in front of a Senate Committee on March 10, 2016 briefing them on the potential North Korean nuclear threat. The Admiral stated it was “prudent to assume Pyongyang had the ability to miniaturize a nuclear warhead” and deliver it via ICBM that could actually strike the continental U.S.
Finally, (and the most compelling proponent of the danger posed by North Korea), Dr. Peter V. Pry, the foremost expert on EMP (Electromagnetic Pulse) threats by established and rogue nations has long upheld that Iran and North Korea hold an EMP first strike as central to their current military doctrines. Pry has spent countless hours briefing Senate Investigating Committees on the dangers of an EMP strike by these two nations.
This year the North Koreans have ramped up their missile tests exponentially, building off of their R&D for the past five years. Kwangmyongsong-3, Unit 2 satellite was placed into orbit December 12, 2012. Kwangmyongsong-4 satellite was successfully launched February 7, 2016. In April 2016 they tested an ICBM engine. May 2015 saw their claim of a successful SLBM (Submarine Launched Ballistic Missile) test, their first. Then this year, March 23, 2016, (as reported by CNN’s Don Melvin, Jim Sciutto, and Wil Ripley on April 24), their success became a reality. Here is an excerpt from that report by CNN:
“After previous launch attempts by Pyongyang failed, this one seems to have gone much better, one U.S. official noted.
“North Korea’s sub launch capability has gone from a joke to something very serious,” this official said. “The U.S. is watching this very closely.”
Asked whether the test was successful, another U.S. official told CNN, “essentially yes.”
The missile traveled 30 km as opposed to the 300 km intended by North Korea, but this is the point: North Korea successfully launched the missile from the submarine. As can be seen, a U.S. official categorized the test as being successful, as well as another one noting the seriousness of North Korea’s newfound capability. They have recently been launching short and medium-range missiles in tests, and these tests have been conducted regularly over the past 6 months and almost nonstop.
On July 22, Jane’s Defence Weekly reported that North Korea has constructed a fortified structure (docks) that can potentially shelter ballistic missile-carrying submarines. Although the report was just made, it was satellite photo imagery that indicated these submarine pens had neared project completion and they were being covered with earth. The satellite photos indicated that the two enclosures measure 490 feet in length by 32 feet in width, with there being about 50 feet in between the two of them. The project had actually been started back in October of 2013.
These are pretty serious reports, and as much as they are laughed at and disparaged, the North Koreans are in deadly earnest about doggedly attaining advances in their nuclear forces’ capabilities. In March of 2016, North Korea threatened that it would conduct a “preemptive and offensive nuclear strike.” The “balance” that has been made is simple, effected by simpletons, as such:
The North Koreans threaten to strike and bluster their nuclear capability. The United States responds with, “Oh, they can’t do that,” or “they don’t have the technology,” or some other such scoffing characterization.
The frightening thing about this tete–a–tete is that neither side’s leaders or elites will face any kind of danger or peril that would result from a nuclear conflagration, but the populations of both countries would suffer immeasurably. A general and an admiral have stated their belief in the miniaturization capabilities of North Korea regarding nuclear warheads. The foremost expert on the EMP has provided prima facie evidence before the Senate and numerous commissions attesting to those capabilities. Each day North Korea ramps up its tests and its threats. Russia and China publicly whisper their disapproval of such actions and words while taking no steps to actually stop them.
The next world war will be initiated by a first strike utilizing an EMP weapon.
There is no timetable. The threat is real, and it is imminent. It is a matter of time before it is carried out. Do you want something more tangible? Here it is. Now would be a good time to construct the necessary Faraday cages for your sensitive electronic equipment you wish to have after a war commences. You’ll also need emergency food, water, medicine, and a stockpile of materials to defend it, hopefully in a remote location.
Naysayers and politicians have one thing in common: denial of the reality of a situation. The difference is that the first group is usually unprepared when it happens and they are ignorant of the situation (in terms of information, and this partially due to denial). The politicians and leaders are the exact opposite: they deny the reality to obfuscate their complete knowledge of the reality, and they are completely prepared for what will unfold…and those politicians and leaders are prepped and defended on your dime, in every way.
- China Unveils 'Pokemon Go Danger' Public Service Announcement
Following reports of an Ohio man shot three times and robbed of his phone while playing ‘Pokemon Go’, it seemed appropriate to share China’s latest Public Service Announcement…
Chinese news channel created this animation to warn people of the dangers associated with Pokemon Go.
LMAO pic.twitter.com/EWygjUepeX
— ZhugeEX (@ZhugeEX) July 25, 2016
- Democrats Question "Loyalty To US" Of "Treasonous, Traitor" Trump
In a full court propaganda press, enabling by a liberal media that can read polling data as well as anyone else, the 'wild conspiracy theory' that Donald Trump coordinated with Putin to hack and expose DNC emails (that prove the level of rigging and collusion that is too much to bear for many democracy-seeking citizens) has now become confirmed fact… entirely lacking any actual facts. In a desperate bid to regain the narrative, as any convention bounce is erased for Hillary Clinton, her surrogates, as The Hill reports, have now stepped it up, calling Trump "treasonous" and a "traitor," questioning "his loyalty to America."
Having earlier stated that he wished Russian hackers accused of breaching the DNC also obtained emails deleted from Clinton’s personal server…
“If they hacked, they probably have her 30,000 emails,” he said during a press conference at his Miami-area hotel. "I hope they do.
“Russia, if you are listening, I hope you are able to find the 30,000 emails that are missing. I think you will probably be rewarded mightily by the press.”
The Democrats have mobilized everyone to change the narrative away from the corruption, rigging, and collusion that is barely beneath the surface of the contentious convention… (via The Hill)
“He is inviting an aggressive country that we are really worried about to invade us,” Sen. Claire McCaskill (Mo.) said on MSNBC. "This is — this is ridiculous, and, frankly, it borders on treasonous."
"It’s terrifying he’s doing as well as he is," she added of the GOP's presidential nominee. "I don’t think this is a man who has any interest in understanding the complexity of foreign policy."
Rep. Steve Israel (N.Y.) closely echoed McCaskill’s concerns during his own interview with MSNBC on Wednesday.
“Well, that borders on treason. Never before have I heard of or seen a candidate not just for president, but for anything, invite a foreign spy agency to hack America’s computers. It’s one thing to be unfit for command, but today he’s proved he’s dangerously unfit for command."
Former CIA Director and Secretary of Defense Leon Panetta earlier Wednesday questioned Trump’s loyalty to the U.S. following the billionaire’s comments.
“I just think that’s beyond the pale,” he said to CNN’s Christiane Amanpour. "I think that kind of statement reflects that he is truly not qualified to be president of the United States.”
Rep. Eliot Engel (N.Y.) said Trump’s comments may encourage further Russian meddling in the general presidential election. Russia is accused of hacking the Democratic National Committee's (DNC) emails and leaking them to WikiLeaks, which released nearly 20,000 of them last week.
“Vladimir Putin is working to influence an American election, and a major-party candidate wants to benefit from this foreign interference by encouraging more illegal hacks,” Engel said in a statement.
“We cannot allow Russia to manipulate American democracy, and we cannot stay quiet when a major American political figure invites foreign influence into American voting booths," said Engel, a ranking member on the House Committee on Foreign Affairs.
And House Democratic Whip Steny Hoyer (Md.) said Trump’s comments raise serious concerns about his patriotism.
“To call on a foreign adversary to commit an illegal act of cybercrime and espionage in order to undermine a political rival is not only un-American, it undermines our national security,” he said in a statement.
"Undermining a politcal rival"? Now who would do such a thing? Debbie? Guilty… guilty… guilty… we hear them cry… we are somewhat reminded of this…
But seriously, of course, Trump never lied under oath; was not responsible for the content of the incriminating emails; and, like many others (except the mainstream media), is perhaps rightly interested in whether anyone (from the NSA to Guccifer) has those 30,000 deleted emails.
We come back to our previous conclusion as to how this sound and fury plays out…
To be sure all of the above ac is circumstantial and while we have no independent insight into any of the above, we are confident that now that the trail has grown "warm", the FBI – which yesterday said that Russia is a prime suspect – will use this as a foundation upon which to build a case blaming the Kremlin for interfering in US politics… will there be more YouTube video proof?
Which then begs the question: just like in the case of Snowden whose "treasonous" act has made him into a cult hero for a great part of the US population due to his pursuit of government accountability, would a Russian hack – if confirmed – be seen as a hostile act, or – when considering the dramatic revelations – one of much needed transparency into corrupt US political practices.
And even if the FBI does find Putin as the gulty party, just how will the US respond? Will this be the first case of "cyberespionage" that escalates to some more conventional form of militaristic retaliation?
- Insanity In Japan
Submitted by Michael Lebowitz via 720Global.com (h/t Lance Roberts at RealInvestmentAdvice.com),
Pondering the state of the global economy can elicit manic?depressive?obsessive?compulsive emotions. The volatility of global markets – equities, bonds, commodities, currencies, etc. – are challenging enough without consideration of Brexit, the U.S. Presidential election, radical Islamic terrorism and so on. Yet no discussion of economic and market environments is complete without giving hefty consideration to what may be a major shift in the way economic policy is conducted in Japan.
The Japanese economy has been the poster child for economic malaise and bad fortune for so long that even the most radical policy responses no longer garner much attention. In fact, recent policy actions intended to weaken the Yen have resulted in significant appreciation of the yen against the currencies of Japan’s major trade partners, further crippling economic activity. The frustration of an appreciating currency coupled with deflation and zero economic growth has produced signs that what Japan has in store for the world falls squarely in to the category of “you ain’t seen nothin’ yet.” Assuming new fiscal and monetary policies will be similar to those enacted in the past is a big risk that should be contemplated by investors.
The Last 25 Years
The Japanese economy has been fighting weak growth and deflationary forces for over 25 years. Japan’s equity market and real estate bubbles burst in the first week of 1990, presaging deflation and stagnant economic growth ever since. Despite countless monetary and fiscal efforts to combat these economic ailments, nothing seems to work.
Any economist worth his salt has multiple reasons for the depth and breadth of these issues but very few get to the heart of the problem. The typical analysis suggests that weak growth in Japan is primarily being caused by weak demand. Over the last 25 years, insufficient demand, or a lack of consumption, has been addressed by increasingly incentivizing the population and the government to consume more by taking on additional debt. That incentive is produced via lower interest rates. If demand really is the problem, however, then some version of these policies should have worked, but to date they have not.
If the real problem, however, is too much debt, which at 255% of Japan’s GDP seems a reasonable assumption to us, then the misdiagnoses and resulting ill?designed policy response leads to even slower growth, more persistent deflationary pressures and exacerbates the original problem. The graphs below shows that economic activity is currently at levels last seen in 1993, yet the level of debt has risen 360% since 1996. The charts provide evidence that
Japan’s crippling level of debt is not helping the economy recover and in fact is creating massive headwinds.
What is so confounding about this situation is that after 25 years, one would expect Japanese leadership to eventually recognize that they are following Einstein’s definition of insanity – doing the same thing over and over again and expecting different results. Equally insane, leaders in the rest of the developed world are following Japan over the same economic cliff.
Throughout this period of economic stagnation and deflation, Japan has increasingly emphasized its desire to generate inflation. The ulterior motive behind such a strategy is hidden in plain sight. If the value of a currency, in this case the Yen, is eroded by rising inflation debtors are able to pay back that debt with Yen that is worth less than it used to be. For example, if Japan were somehow able to generate 4% inflation for 5 years, the compounded effect of that inflation would serve to devalue the currency by roughly 22%. Therefore, debtors (the Japanese government) could repay outstanding debt in five years at what is a 22% discount to its current value. Said more bluntly, they can essentially default on 22% of their debt.
What we know about Japan is that their debt load has long since surpassed the country’s ability to repay it in conventional terms. Given that it would allow them to erase some percentage of the value of the debt outstanding, their desperation to generate inflation should not be underestimated. One way or another, this is the reality Japan hopes to achieve.
QE
Quantitative easing (QE) is one of the primary monetary policy approaches central banks have
taken since the 2008 financial crisis. With short term interest rates pegged at zero, and thus the traditional level of monetary policy at its effective limit, the U.S. Federal Reserve and many other central banks conjured new money from the printing presses and began buying sovereign debt and, in some cases mortgages, corporate bonds and even equities. This approach to increasing the money supply achieved central bank objectives of levitating stocks and other asset markets, in the hope that newly created “wealth” would trickle down. The mission has yet to produce the promised “escape velocity” for economic growth or higher inflation. The wealthy, who own most of the world’s financial assets, have seen their wealth expand rapidly. However, for most of the working population, the outcome has been economic struggle, further widening of the wealth gap and a deepening sense of discontentment.The Nuclear Option
In 2014, as the verdict on the efficacy of QE became increasingly clear, European and Japanese central bankers went back to the drawing board. They decided that if the wealth effect of boosting financial markets would not deliver the desired consumption to drive economic growth then surely negative interest rates would do the trick. Unfortunately, the central bankers appear to have forgotten that there are both borrowers and lenders who are affected by the level of interest rates. Not only have negative interest rates failed to advance economic growth, the strategy appears to have eroded public confidence in the institution of central banking and financially damaging the balance sheets of many banks.
In recent weeks, former Federal Reserve (Fed) chairman Ben Bernanke paid a visit to Tokyo and met with a variety of Japanese leaders including Bank of Japan chairman Haruhiko Kuroda. In those meetings, Bernanke supposedly offered counsel to the Japanese about how they might, once and for all, break the deflationary shackles that enslave their economy using “helicopter money” (the termed was coined by Milton Freidman and made popular in 2002 by Ben Bernanke). What Bernanke proposes, is for Japan to effectively take one of the few remaining steps toward “all?in” or the economic policy equivalent of a “nuclear option”.
The Japanese government appears to be leading the charge in the next chapter of stranger than fiction economic policy through some form of “helicopter money”. As opposed to the prior methods of QE, this new approach marries monetary policy with fiscal policy by putting printed currency into the hands of the Ministry of Finance (MOF or Japan’s Treasury department) for direct distribution through a fiscal policy program. Such a program may be infrastructure spending or it may simply be a direct deposit into the bank accounts of public citizens. Regardless of its use, the public debt would rise further.
According to the meeting notes shared with the media Bernanke recommended that the MoF issue “perpetual bonds”, or bonds which have no maturity date. The Bank of Japan (BOJ or Japan’s Central Bank) would essentially print Yen to buy the perpetual bonds and further expand their already bloated balance sheet. The new money for those bonds would go to the MoF for distribution in some form through a fiscal policy measure. The BoJ receives the bonds, the MoF gets the newly printed money and the citizens of Japan would receive a stimulus package that will deliver inflation and a real economic recovery. Sounds like a win?win, huh?
Temporarily, yes. Economic activity will increase and inflation may rise. Let us suppose that the decision is to distribute the newly printed currency from the sale of the perpetual bonds directly into the hands of the Japanese people. Further let us suppose every dollar of that money is spent. In such a circumstance, economic activity will pick up sharply. However, eventually the money will run out, spending falters and economic stagnation and decline will resume.
At this point, Japan has the original accumulated debt plus the new debt created through perpetual bonds and an economy that did not respond organically to this new policy measure. Naturally the familiar response from policymakers is likely to be “we just didn’t do enough”. It is then highly probable another round of helicopter money will be issued producing another short lived spurt of economic activity. As with previous policy efforts, this pattern likely repeats over and over again. Each time, however, the amount of money printed and perpetual bonds issued must be greater than the prior attempts. Otherwise, economic growth will not occur, it will, at best, only match that of the prior experience.
Eventually, due to the mountain of money going directly in to the economy, inflation will emerge. However, the greater likelihood is not that inflation emerges, but that it actually explodes resulting in a complete annihilation of the currency and the Japanese economy. In hypothetical terms as described here, the outcome would be devastating. Unlike prior methods of QE which can be halted and even reversed, helicopter money demands ever
increasing amounts to achieve the desired growth and inflation. Once started, it will be very
difficult to stop as economic activity would stumble.The following paragraph came from “Part Deux – Shorting the Federal Reserve”. In the article we described how the French resorted to a helicopter money to help jump start a stagnant economy.
“With each new issue came increased trade and a stronger economy. The problem was the activity wasn’t based on anything but new money. As such, it had very little staying power and the positive benefits quickly eroded. Businesses were handcuffed. They found it hard to make any decisions in fear the currency would continue to drop in value. Prices continued to rise. Speculation and hoarding were becoming the primary drivers of the economy. ‘Commerce was dead; betting took its place.’ With higher prices, employees were laid off as merchants struggled to cover increasing costs”.
The French money printing exercise ultimately led to economic ruin and was a leading factor fueling the French revolution.
Summary
Is it possible that Bernanke’s helicopter money approach could work and finally help Japan escape deflation in conjunction with a healthy, organically growing economy? It has a probability that is certainly greater than zero, but given the continual misdiagnoses of the core problem, namely too much debt, that probability is not much above zero. There is a far greater likelihood of a multitude of other undesirable unintended consequences.
Of all the developed countries, Japan is in the worst condition economically. Most others, including the United States, are following the same path to insanity though. Unlike Japan, other countries may have time to implement policy changes that will allow them to avoid Japan’s desperate circumstances.
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