Start the conversation
Leave a Reply
Seeking out major trends and power shifts in the global economy is the part of my work that I enjoy most.
It's a lot of work, and needless to say, it involves constant research.
That's why a piece I recently read in Foreign Affairs absolutely shocked me…
The piece is a bit revolutionary, as its authors speak to a drastically different way of stimulating an ailing economy than the path we're on today.
In fact, the ideas and views are so radical that I couldn't help but wonder why the authors were taking such an unusual position. What I found was just as shocking as their views.
After all, their theories, and the policymakers who embrace them, pose an existential threat to all our wealth…
This Strategy Is (Quite Literally) an Old Joke
The article in question is "Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People" by Mark Blyth and Eric Lonergan.
It appeared on the website ForeignAffairs.com and it is published by the Council on Foreign Relations.
Essentially, Blyth and Lonergan recommend a completely new approach to economic stimulation: Have the Fed create cash, and deposit it directly into people's bank accounts.
It's actually an idea the renowned economist Milton Friedman came up with in jest, and the origin of the phrase "dropping money out of a helicopter," which he famously quipped could be used to fight price deflation.
Ben Bernanke, while teaching economics at Princeton in 1998, also suggested the Bank of Japan could give cash directly to consumers to boost demand and kick-start inflation.
There are so many problems with this proposal as presented in Foreign Affairs, I hardly know where to start.
But let's take a look at just some of the assertions, and ideas that have me so fired up.
Like this one:
Today, most economists agree that like Japan in the late 1990s, the global economy is suffering from insufficient spending, a problem that stems from a larger failure of governance… It's well past time, then, for U.S. policymakers – as well as their counterparts in other developed countries – to consider a version of Friedman's helicopter drops. In the short term, such cash transfers could jump-start the economy. Over the long term, they could reduce dependence on the banking system for growth and reverse the trend of rising inequality. The transfers wouldn't cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them.
Are you kidding me? First of all, if most economists agree, then chances are they're wrong. What do the authors expect will happen when the Fed stops giving cash directly to citizens?
And what about the risk people will become dependent on even more government handouts? Already over 50% of American households receive some form of government benefits.
And what about the inflationary effects of just printing money, with no underlying productive economic activity (good or service) to justify this supposed "wealth"?
The Irrational Fear of Deflation
Come to think of it, if that were all it took, why isn't Zimbabwe the richest nation on the planet? Its central bank tried the solution of printing insane amounts of money.
In 1998 Zimbabwe's inflation rate was 32%. By 2008 it hit an astronomical monthly rate of 79,600,000,000%.
Eventually, Z$100 billion dollar notes were issued. The Zimbabwe dollar became so worthless that signs like the one above were posted in public restrooms.
Nevertheless, Blyth and Lonergan continue:
Other governments have still followed Bernanke's lead. Japan's central bank, for example, has tried to use its own policy of quantitative easing to lift its stock market. So far, however, Tokyo's efforts have failed to counteract the country's chronic under-consumption…And some countries, such as Portugal and Spain, may already be experiencing deflation. At best, the current policies are not working; at worst, they will lead to further instability and prolonged stagnation.
Governments are terrified of deflation because of the massive debts which they know they will never be able to repay, or admit. Deflation increases the value of debt making it more costly. All they can do is try to create inflation so that the future cost of the debt becomes manageable.
But deflation is actually positive for the average person. Prices of goods and services decline, allowing the same income to buy more.
As Money Morning Special Contributor Jim Rickards describes in his recent book The Death of Money, former Japanese deputy finance minister Eisuke "Mr. Yen" Sakakibara understands this phenomenon. He explains Sakakibara's view that "…because of Japan's declining population, real GDP per capita will grow faster than real aggregate GDP. Far from a disaster story, a Japan that has deflation, depopulation, and declining nominal GDP can nevertheless produce robust real per capita GDP growth for its citizens. Combined with the accumulated wealth of the Japanese people, this condition can result in a well-to-do society even in the face of nominal growth that would cause most central bankers to flood the economy with money."
This is exactly what we've seen with the "Abenomics" phenomenon.
Rickards continues:
Join the conversation. Click here to jump to comments…
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.