Oh Wait! There Is an Answer! It’s Called Helicopter Money!

JackLewLast week as the G-20 meetings were taking place I noted that the establishment is increasingly aware, even though it is not admitting it, that there is nothing more that the Fed can do to stimulate growth through monetary growth. If anything, future QE policies will do more harm than good. Living in the political realm, Secretary Treasurer Jack Lew had to pretend that he and other policymakers have answers. As he was preparing for the G-20 meeting he was saying that growth had to be generated. Yes, but how is he, a Keynesian, going to accomplish that when the only thing the Keynesians know is to deficit spend and print money to pay for deficit spending. The trouble with stimulating growth in the Keynesian world is that it is now proven that it simply doesn’t work in the long run. And now after 45 years, when Nixon declared, “We are all Keynesians now,” we are seeing the limits to government stimulus. We have reached peak debt such that more debt starts to throw the economy into reverse, which is what I believe my IDW is clearly telling us. Lew says that countries shouldn’t start currency devaluation. Yet if countries follow the only answer they know for stimulus, they have to engage in currency wars because they have to print money to pay for deficit spending implemented to stimulate demand. So in my view, Lew is indirectly saying he, as a Keynesian, has no answer for getting the global economy back on a growth path.

PeterFisherPeter Fisher was more upfront about the dire situation we find ourselves in. Peter clearly said the Fed and other central bankers are moving toward negative interest rates but that policy cannot succeed for three reasons, all of which are outlined in remarks he made on Bloomberg TV during the last week of February. If you are interested in understanding why negative rates are doomed to fail in stimulating growth, please read the transcript of Peter Fisher’s Bloomberg remarks below. There are three distinct reasons why negative rates cannot work, especially in a larger economy like the U.S. Peter’s conclusion was that the Fed and other central bankers simply can’t admit that they have no answers and that their policies have been an abysmal failure to date.

But Wait! Uncle Ben Bernanke Has His Helicopter!

BenBernankeOn Thursday of this week, Ray Dalio appeared on Bloomberg TV to agree with Peter Fisher that the Fed is out of bullets and he offered the same answer as Ben Bernanke provided in his infamous Nov. 21, 2002, speech, “Deflation, Making Sure It Doesn’t Happen Here.” The answer is simple: Just shower the economy with “helicopter money.”

Here are a couple of excerpts from Dr. Bernanke’s speech that shows that all along he was planning for “helicopter money,” which is exactly the perilous state the U.S. economy finds itself in now that zero interest rates are not only not working, but are also throwing the global economy into reverse:

“As I have mentioned, some observers have concluded that when the central bank’s policy rate falls to zero–its practical minimum–monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.”

Bernanke then outlined several steps that the central bank should take to avoid needing to move to zero rates, all of which Mr. Bernanke and his predecessor have taken, but to no avail. Here are the basic steps he suggested, which have obviously been incompetent:

• During normal times, keep inflation above some level, in a “buffer zone,” by stimulating demand by creating money out of thin air.
• Open the discount window so that banks can borrow funds that can be used to expand their balance sheets through lending.
• Engage in aggressive easing of rates to keep demand high so that deflation doesn’t take place.
• If the above measures don’t work, simply pump more money into the system such that with more money created, it will cause the price of goods to rise.
• The Fed should go into the market and buy various assets, starting with Treasuries, thus pumping money into the banking system, which, when making its way into the economy, will lead to higher prices.
• Also, the Fed should buy long-dated U.S. Treasuries, thus pushing down the long end of the yield curve, which will lead to rising housing prices and other fixed assets.

All of the above measures were supposed to stimulate the economy. But in fact they have all been an abysmal failure, as my IDW demonstrates. And so, the final answer when all else fails, as the following quote from Ben Bernanke’s infamous Nov. 2002 speech shows, is simply drop money all over the country. After all, it is digital money that costs nothing to produce. Here is what Dr. Bernanke said in that speech:

All I can say is, “Oh, what foolishness!” First of all Bernanke doesn’t understand, as Austrian economists do, that real capital is generated from savings, not from a printing press or from computers. And so the Fed has all along been destroying capitalism by disallowing price recognition of capital (savings). Not only does this bastardized price of capital result in mal investment into nonsense allocations and over consumption, but given fiat money is liability money, it leads inexorably toward more and more debt accumulation at a faster and faster rate of speed. In fact it is debt that is choking the global economy.

DonaldTrumpYet, as Ron Paul told me many years ago on my radio show, the Fed can in fact generate inflation if it truly desires to do so. It won’t literally drop money from helicopters. But it can most definitely create digital money and send it to your bank accounts, much as they do when they give you a tax rebate. When the wheels are about to fall off the wagon, and the natives are getting very, very angry—as their support of Donald Trump suggests that they are, I do not doubt that the Washington and Wall Street power brokers will feed the masses some crumbs after they have made sure they have secured their money in some form that cannot be destroyed by hyperinflation.

In fact, I’m wondering if this gold price that is busting through Michael Oliver’s $1,260 magic breakout price may not be suggesting that the Ray Dalios of this world are not already starting to load up on gold.

On my March 1 radio show, I spoke to John Williams, who is sticking to his guns in suggesting that we are getting very close to a hyperinflation. If we are about to start helicopter money, I can’t imagine that the foxes who pretend to be guarding the chicken coops of America’s middle class wouldn’t be licking their chops, realizing that the real wealth yet to be gained will be by switching the fraudulent paper money they create into real money, like gold and silver. Believe me, I am not cheering for this event, because if we go into a hyperinflation, it will bring with it hellish living conditions that will make the 1930s look tame by comparison because hyperinflation is twice as bad as a deflationary depression. In a deflation, savers are rewarded and spendthrifts are punished. In a hyperinflation everyone is punished. Yes, better to have gold than not. But infrastructure, safety, food supplies, etc., may all be at risk. Realizing that Keynesian economics is pathological, all Austrian economic thinkers have known this day would come. But it was never nor should it ever be a day of rejoicing because it will bring with it great civil disorder and unspeakable harm to our living standards.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.