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...
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"?
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:
Sakakibara's insights, that monetary remedies will not solve structural problems, and that real growth is more important than nominal growth, are being ignored by central banks in both the United States and Japan. The Federal Reserve and the Bank of Japan will pursue the money-printing pseudo-remedy as far as possible until investors finally lose confidence in their currencies, their bonds, or both. Japan, the canary, will likely suffer this crisis first.
On the other hand, Blyth and Lonergan write:
The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.
Such an approach would represent the first significant innovation in monetary policy since the inception of central banking, yet it would not be a radical departure from the status quo. Most citizens already trust their central banks to manipulate interest rates [emphasis added].
How do these guys know that "Most citizens already trust their central banks to manipulate interest rates"?
Besides, can any statement be more misleading? They admit interest rates are "manipulated." Yet they claim citizens "trust" their central bank to do this. Newsflash: nearly one year ago, a Pew Research Center report indicated that just 19% of Americans surveyed said they trust the federal government to do what is right just about always/most of the time, right near an all-time low.
Finally, Blyth and Lonergan make their most outrageous assertion:
Conventional accounting treats money - bank notes and reserves - as a liability. So if one of these banks were to issue cash transfers in excess of its assets, it could technically have a negative net worth. Yet it makes no sense to worry about the solvency of central banks: after all, they can always print more money... Moreover, many American conservatives consider cash transfers to be socialist handouts.
I can hardly contain my laughter. Central banks are supposed to be the backstop for the banking system. We should all worry about their solvency, especially when they keep printing more money. That's exactly the sort of thing that destroys people's confidence in them.
Blyth and Lonergan state the obvious in such a nonchalant way, it's clear they figure their ideas are quickly becoming conventional thinking.
I also have to give credit where it's due. Sometimes stating the obvious is not that easy. Cash transfers are socialist handouts, especially if you're targeting the bottom 80% of households. That's because inflation caused by the printed money becomes a cost to all of society, but in particular it becomes a wealth transfer, especially from those with savings to those without.
Here's what's really happening here...
Most of the suggestions and arguments put forward in this article are so nonsensical, I'd be embarrassed to put my name to them.
It even made me wonder if the authors could be misleading readers. Well, if you look a little deeper into the organization behind the article, that just may be your conclusion.
You see, Foreign Affairs is published by the Council on Foreign Relations (CFR). Sure, there are lots of prominent leaders, business people, and media who are members. But it's often their influence and what they do with it that's the problem.
This is nothing other than the fox guarding the chicken coop, and Jim Rickards revealed this fundamental conflict of interest in The Death of Money:
The members of the [former Treasury Secretary] Robert Rubin clique are extraordinary in the incompetence they displayed during their years in public and private service, and in the financial devastation they left in their wake.
Rubin and his subordinate and successor, Larry Summers, promoted the two most financially destructive legislative changes in the past century: Glass-Steagall repeal in 1999, which allowed banks to operate like hedge funds; and derivatives regulation repeal in 2000, which opened the door to massive hidden leverage by banks... The lost wealth and personal hardship resulting from the Rubin clique's policies are incalculable, yet their economic influence continues unabated. Today, Rubin still minds the global store from his seat as co-chairman of the nonprofit Council on Foreign Relations [emphasis added].
Let's sidestep this self-serving "journalism" altogether...
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