Keynesian Fairy Tale Alert: Establishment Citadel—Council On Foreign Relations—-Peddles Helicopter Money Plan

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Folks, take economic cover. There is already a rabid financial mania loose in the land as reflected in the irrational exuberance of the stock market. But now the fairy tale economics fueling the current financial bubble is fixing to leap into a whole new realm of lunacy. Namely, an out-and-out drop of “helicopter money” to the main street masses.

That’s right. The Keynesian brain freeze has so deeply infected the Wall Street/ Washington corridor that the gray old lady of the establishment, the Council On Foreign Relations, has lent the pages of its prestigious journal, Foreign Affairs, to the following blithering gibberish:

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…..  Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. 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.

I have actually checked, and, no, the publishing arm of the Council on Foreign Relations has not been hacked by writers from the Onion. This monetary insanity is for real!

Worse still, this sophmoric prattle is supposed to be based on economic reasoning and purported structural changes in modern economies that cause people everywhere to under-consume and over-save. Hence the need to drop fiat money from the sky so that citizens spend one afternoon per week scooping-up the new money and six-and-one-half days per week in an orgy of consumption and gluttony.

Well, that’s what the authors—a political science professor from Brown and a beltway bandit from Washington DC—actually say. Since their “under consumption” thesis completely denies every known fact about modern economies, their “analysis” needs to be quoted verbatim:

Three trends explain why. First, technological innovation has driven down consumer prices and globalization has kept wages from rising. Second, the recurring financial panics of the past few decades have encouraged many lower-income economies to increase savings — in the form of currency reserves — as a form of insurance. That means they have been spending far less than they could, starving their economies of investments in such areas as infrastructure and defense, which would provide employment and drive up prices. Finally, throughout the developed world, increased life expectancies have led some private citizens to focus on saving for the longer term (think Japan). As a result, middle-aged adults and the elderly have started spending less on goods and services.

Alrighty then, for a starter lets “think Japan” and explore the savings glut thesis. Does the chart below suggest that Japan’s robust pre-1990 growth rate—which the authors laud—-has vanished during the last two decades because the savings rate went up?

In fact, it has plummeted from north of 20% during Japan’s heyday of growth to a US style 3% at present.  Worse still, this occurred during the waning years before Japan began turning into a retirement colony. That is, instead of building up a nest egg for their graying years, Japanese households in recent times have spent nearly everything they earned.

So even though Japan’s real GDP growth rate drastically downshifted from 4-7% during the pre-1990 boom years to just 1% annually during the last two decades, it wasn’t due to a “savings glut”.  Even the most superficial examination of the data establishes that truth.

jh

Nor is Japan an outlier among developed economies. The US picture is virtually the same over this period. The household savings rate during the pre-1980 period, and before the Greenspan-Bernanke-Yellen money printing era got fully underway, was always above 10% of disposable income. As shown below, it has tumbled into the 3-6% zone since the late 1990s.

Like in Japan, therefore, the US baby boomers were spending almost all they earned in their most productive years. Accordingly, the sharp down-shift in the US  real GDP growth rate—-from 3-4% pre-1980 to only 1.8% during the last 14 years—- is not due to a “savings glut”, either.

In a word, the entire “savings glut” theory  is upside down with respect to Japan, the US and the developed economies of Europe as well. All of these societies are now getting old, fast. The real problem is that they have over-consumed, not over-saved, during the central bank sponsored debt party of the last 30 years.  Consequently, the actual culprit weighing down real growth is “peak debt” on household, business and government balance sheets, not a perverse failure to spend.

In fact, during the several decades leading up to the financial crisis, household and business leverage ratios were steadily ratcheted-up, meaning that consumption spending was financed by currently earned income plus borrowed funds from the credit card, mortgage and consumer loan markets.  But the resulting consumption spree was a one-time economic trick that has now been exhausted.

Household Leverage Ratio - Click to enlarge

Household Leverage Ratio – Click to enlarge

Accordingly, the credit expansion channel of monetary stimulus is now broken and done. All of the massive balance sheet expansion by major central banks is being shunted into the financial gambling channel where it fuels asset price inflation, not main street jobs, output and enterprise.

Stated differently, the downshift in developed world growth is not due to under-consumption and insufficient “aggregate demand”. The latter is a wholly derivative economic “ether” that has no reality apart from current period spending that is derived from either income or borrowing.

The GDP of developed world economies is growing at “only” 1-2% per annum, therefore, for the simple and immutable reason that consumption spending is no longer supercharged by credit-based spending from rising household leverage ratios. Instead, PCE growth is constrained through the income channel to the growth rate of production, which is also languishing in this same tepid 1-2% zone. But that’s a problem on the supply-side—reflecting high taxes, high debt burdens, regulatory hurdles to enterprise and the vast financialization of developed economies owing to central bank distortion of financial markets.

Self-evidently, money is flowing in a mighty tidal wave into the Wall Street casino where it is driving the price of existing financial assets skyward. In that environment, labor cannot compete with debt, and so it is is liquidated on the margin in order to generate incremental cash flow to pay the interest.

Likewise, investment in productive assets cannot compete with the short-run boost to stock prices resulting from massive corporate stock repurchases. So the growth rate of the capital stock has fallen sharply—-with annual net investment after depreciation now 20% below its turn of the century level.

Real Business Investment - Click to enlarge

Real Business Investment – Click to enlarge

At the end of the day, ironically, helicopter money—-the kind currently being dropped on the financial markets—-is the overarching problem. Redirecting the fleet to main street is obviously nothing more than crackpot economics.

The real problem is way too much debt—the legacy of Keynesian central banking, manipulated, sub-economic interest rates and the consequent scramble for yield which has enabled governments to borrow and spend at unsustainable rates. Now the piper has to be paid, and the phony growth that was stolen from the future during the bubble years must unavoidably be recouped.

Indeed, when the US data from the above chart is inspected more closely, the barrier of peak debt fairly screams out. And the back story only further demolishes the authors’ thesis as quoted above.

They claim that the peasants who came out of the rice paddies and into the factories of East China saved too much on the one hand, and drove down the price of labor on the other, thereby causing developed world wages to stagnate and household consumption spending in Chicago and Paris to languish.

Now that is really Keynesian hogwash. The soaring ratio of US debt to national income shown below was enabled by the Fed and its vast expansion of dollar liabilities. The latter, in turn, financed $8 trillion of current account deficits since the late 1970s.

The effect was that US exported dollar inflation, and mercantilist central banks in China, Japan, South Korea and elsewhere in Asia and the developing world bought-up this vast dollar inflow and sequestered it in their central banks. So doing, they were able to peg their currencies at sub-economic levels, fuel their export based development model and keep domestic wages deeply repressed in dollar terms.

Accordingly, the vaunted and massive “currency reserves” of the developing world reflected not an excess of genuine savings, but an abundance of domestic money printing.

Likewise, the “cheap labor” which allegedly suppressed US consumption was actually nothing more than economic blow-back. Attempting to inflate domestic spending through cheap debt and the emission of a massive and continuous flow of unwanted dollars into the world market, our Keynesian central bankers ended-up pricing American labor out of the world market and shrinking domestic production capacity through the off-shoring of tradable goods.

Needless to say, someone needs to give the Council On Foreign Relations a seminar on Say’s Law. Economic growth, wealth and sustainable prosperity comes from work, enterprise,investment and invention. Aggregate demand always and everywhere derives from what is first supplied.
The exception is demand financed by borrowing via the one-time leveraging of current income. The latter works only until the debt carry becomes unsustainable. It self-evidently has.
For the entire text of this incredible economic nonsense, see:

Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People

By Mark Blyth and Eric Lonergan

http://www.foreignaffairs.com/articles/141847/mark-blyth-and-eric-lonergan/print-less-but-transfer-more

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15 comments
rsenn
rsenn

The idea has similarities to a citizens' wealth fund, which is based on investments that all right thinking people favor.


www.citizenswealthfund.org

samjcr
samjcr

 Helicopter money It is not Keynes economics. It was more Greenspan, Ayn Rand. Keynes was for stimulation (highways, infrastructure, innovation expenditures) in a slump. Kennedy successfully used his and Nobel Prize winner Klugman type of theory.  Even Nixon "In late 1965 Time magazine ran a cover article with a title comment from Milton Friedman (later echoed by U.S. President Richard Nixon) that "We are all Keynesians now". The article described the exceptionally favourable economic conditions then prevailing, and reported that "Washington's economic managers scaled these heights by their adherence to Keynes's central theme: the modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government."

Samuel Butler, BA Economics, Berkeley, 1959.


gzibordi
gzibordi

why do Stockman keeps saying "keynesians", when the article is not based on Keynes, but on Milton Friedman's "helicopter money" ? Anyway, Say's Law is wrong, and the fact that it is wrong is really important for macroeconomics. I like Stockman but he studied history and the attended Harvard Divinity School. It's not obvious why Say's Law is wrong and you do not need Keynes to prove, just understanding money.

It is money (qua medium of exchange) and only money, that makes Say's Law wrong.

Say's law would be correct in a barter economy; it is not correct in a monetary exchange economy....

Say's law 101. Can people plan to spend more than their (planned/expected) income? In a barter economy: no. In a barter economy, an offer to buy is an offer to sell. "Wanna swap 5 of your bananas for 10 of my apples?". I plan to earn 10 apple's worth of income and spend it on 5 bananas, but we cannot distinguish the act of earning income from the act of spending it. And anybody who planned to buy goods of a greater or lesser exchange value than those he planned to sell has made some sort of arithmetic mistake.

But in a monetary exchange economy... I can plan to buy goods of greater exchange value than the goods I plan to sell if I plan on reducing my stock of money. And if everyone plans to do the same, and if they realise those planned expenditures, they will be surprised to find their incomes rising by the same amount. There is no logical inconsistency in people planning to spend more with the same income in a monetary exchange economy. General gluts are always and everywhere a monetary (medium of exchange) phenomenon. The very distinction between Aggregate Demand and Aggregate Supply is a monetary (medium of exchange) phenomenon.

Al Tinfoil
Al Tinfoil

We are seeing a new paradigm: GREEN ECONOMICS!  In Green Economics, money actually does grow on trees.  All the government needs to do to usher in a new age of prosperity is to declare the leaves on the trees to be money.  But, since the rush for wealth would denude the trees and lead to deforestation, I propose a better approach from the same vein:  Declare weeds to be money.  While gathering wealth, people would be clearing farmland, beautifying the environment, and eliminating noxious weeds.  The amount each person gained would be proportional to the amount of time and labor expended in weeding, an American ideal.  The gathered weeds could be stored in heaps, and credits given as Compost Dollars.  If the market value of Compost Dollars declines, they could always be useful to fertilize vegetable gardens.

The EPA can be mandated to declare which species are weeds, and "weed credits" can be gained on a weighted basis for different species depending upon their environmental impact.  A Weed Credit Exchange would be made available for those who fail to meet Weed Targets.


Seriously, while the idea of distributing fiat money to the masses, instead of only to the rich banksters and their 1% friends, has a nice egalitarian feel to it, it is sailing awfully close to Communism.  The idea that the government should give to the poor instead of to the rich sounds a lot like dreaded Socialism.  Next, someone will propose the elimination of all taxation, since the government just borrows all the money it needs from the Fed, and the Fed just invents it out of thin air. Without taxation, politicians will go into cold-turkey withdrawal.

ThomasEddlem
ThomasEddlem

I will assign this -- along with the Foreign Affairs article you cited -- as homework for the Economics class I teach to high school seniors. 

ChrisAGoodwin
ChrisAGoodwin

( Sorry, I am not as young as I used to be, and my eyesight is not what it was) -- your fifth chart, debt as a % of GDP - is too small for me to distinguish, and cannot be enlarged. You exhort us to  "..(more closely inspect) .. the US data from the above chart  ..."  I'd love to, but I cannot. Please take pity on your more unfortunately endowed readers: the spirit is willing, but the retina is slowly discombobulating.


But I get your drift, and I applaud your witness.

GMA Mac
GMA Mac

So, Mr. Stockman...please share with us any realistic possibilities / directions you have in mind to stop this insanity. Are there ANY comprehensive thinkers within government who are capable of understanding the cause / effect picture you are painting? Or, are we all now just along for the ride on an out of control, runaway train...helplessly waiting for the derailing?

DickVondenballs
DickVondenballs

Keynes for Keynes (it doesn't mean that I'm for Keynes), I think it would be effectively better if some of this money, that's flushed away anyway, was given directly to consumers. Because what does the banker do when is maturity arbitrage has landed him another $ 50 mil? He buys another classic Ferrari or another Triptych that gathers dust somewhere in his garage or grand ball room. 

lloydholiday
lloydholiday

In my previous comment I talked about "free trade" deals and the jobs that were lost from the US because of them. Millions of jobs have been lost (as Ross Perot predicted in 1991). And isn't all of this so-called Keynsian money printing and ZIRP about the government trying to compensate for these lost jobs. That's the reason they give for it. "We're trying to create jobs," they say. Certainly if the jobs came back, it would all stop. Maybe they don't care about jobs at all. Maybe their friends on wall street like the free money and the jobs thing is just an ongoing excuse to keep ZIRP and money printing going. Maybe its all been planned this way.

JackMarse
JackMarse

"The real problem is that they have over-consumed, not under-saved, during the central bank sponsored debt party of the last 30 years." has typo "not under-saved" should be "not over-saved".

lloydholiday
lloydholiday

I wonder what David Stockman thinks about the many "free trade " deals that were entered into by the USA in the past 20 years or so, and the effect they have had on the middle class wages and standard of living. These have allowed companies from Apple to Caterpillar and on and on to move their manufacturing plants offshore. Inside the USA the HB1 visas allow foriegn workers to take jobs from US citizens and this also lowers US wages. Then there are the illegal immigrants who also lower wages and take US citizens' jobs as well as drain US social services. Add it all up, plus a few other things, and I think it has a major negative effect on the US economy.

ChrisAGoodwin
ChrisAGoodwin

@samjcr Keynes did not use the term "helicopter money" - probably because helicopters were not so ubiquitous in his time - but he was certainly in favour of the economic concept of throwing money at an economy in order to  jazz it up (not clear if he would have used the term "jazz up," either, but you get the drift, no doubt?)  His preferred method of randomly (i.e. not economically,) distributing money was to put money, presumably (wads of?) rolled up banknotes in bottles - and "hiding" them in publicly accessible places: the lucky finders would get money to spend - so that would be all right, would'nt it?  Or not.



Does anybody care about what idiocy the fools of yesteryear were party to?  If economics were a science, instead of a political religion, we would cheerfully forget the error quoters, and retain only the pith of valuable learnings: instead, we have the Holy Men, the Saints, the Prophets, before whom the faithful must bow down, and in whom no blemish is visible.

MattThompson2
MattThompson2

@samjcr  The insinuation that Ayn Rand supported "helicopter money" or any other kind of government intervention in the economy is absurd and false.

On the contrary
On the contrary

@gzibordi


Say's law is incontrovertible in a sound money regime, i.e. money backed by gold or silver.  And it is the fact that governments have arrogated to themselves the power of legalized counterfeiting (in the US, illegally, contrary to the Constitution) that the world economy has been coopted by the rich and powerful who control the governments of the world, into set of financial Ponzi schemes to divert most of the world's income and wealth into their own pockets.  Sooner or later, all fiat monies go to zero, taking all financial assets down with them.  So far, the US$ as of 1913, when the Federal Reserve was created, has lost 98.5% of its value, but about 98.5% of all Americans, including, apparently, many of the commentators to this column, are too stupid and too ignorant to be able to figure out how they are being scammed.


It should be obvious to all with half a brain that credit isn't money, and only masquerades as demand or brings future demand temporarily forward to the present day, because it has to be repaid with interest.  Borrowing money, except perhaps to tide one over an emergency, can only be justified if it is used to invest in an enterprise sufficiently profitable to be able to cover the interest and then some.  That's Economics 101.  It's also common sense. 

BarryRose
BarryRose

@GMA Mac  I believe both of your premises are true, not 'either/or'.  D.C. knows exactly what is going on, and the expected outcome.  However, they have little will to do anything other than pad the nests of their rich friends so they have a comfortable place to hide when it all come crumbling down.  Our government is broke and existing on borrowed money, and now they want to give money to the masses. I had to smile when I read it, and read it again, because it brought up an image of a Roman emperor in the coliseum, passing out bread to the poor who had come to watch the bloody entertainment.  Smoke & mirrors - pacify the masses. All the while passing out DHS's 1.6 billion rounds of ammo, buying mine resistant armored vehicles & select-fire AR15's for domestic use.  D.C. is already preparing for the collapse...