Former Fed chair Ben Bernanke’s meeting with Japanese authorities early last week sparked fervid speculations that the fresh electoral victory by PM Shinzo Abe would extrapolate to the administration’s introduction of the “helicopter money”.
The proposed adaption of Helicopter money represents essentially a fiscal policy. However, the difference with that of QE is that such increase government spending will be financed directly by the central bank through the printing press via debt purchasing. Or central banks will monetize government spending via the printing press. Another difference, spending targeted on the real economy rather than merely through financial channels.
Nevertheless the promise of “helicopter money” means that developed economy governments will likely inundate global economies with liquidity. With Japan as likely the first developed nation to experiment on Bernanke’s “helicopter money”, the yen crashed by a shocking 4.32%! But such crash has implied of the triggering of the yen carry or borrowing or shorting of the yen to finance arbitrages on assets of other ex-USD currencies.
Remember for Japan, after ZIRP, QE, NIRP and now comes helicopter money. Like a late stage cancer patient, every new applied medication provides a shot of adrenalin of hope. But eventually reality based on entropic economic forces will dominate.
Just look at how the Nikkei 225 has transformed into a humongous rollercoaster.
Since the Helicopter money was floated the Nikkei spiked by 9.2% this week and 12.19% includingFriday of the other week. To consider that the Bank of Japan has accounted for as top 10 shareholders of 90% of the Nikkei composite stocks!
Sustained interventions by the BOJ would mean that the pricing discovery function of Japan’s stock markets would lose its essence.
Furthermore, Nikkei companies has been transforming into wards of the Japanese government or as state owned enterprises. Should the Japanese government continue to muster shares, policy actions will now be coursed through the board room than through policies. In addition, given the Japanese government’s increased absorption of the private sector, this translates to a slippery slope of socialism of the Japan’s economy.
In other words, the effects from the aggregate interventions by the Japanese government and by the BOJ had little or no improvements to show. What it has done has been to amplify volatility and to accrue more systemic imbalances.
But there has been no accountability for policy errors. In fact, in the bizarre world of politics the Japanese rewarded the Abe with a landslide victory! And PM Abe’s recourse has been to double down on gambling with the citizenry’s wellbeing through more radical experiments! ZIRP, QE and NIRP had all failed. The Japanese government had also tried various forms of stimulus since its bubble bust in 1990! Perhaps Abe’s motto may have been “Try and try until the Japanese die”!
Yet via Bernanke, the Japanese government is now considering an emerging market policy path of fiscal deficit monetization by the central bank in order to combat deflation. In short, desperation seems to force the hand of the Japanese government to embrace the Argentine and Venezuela model. Except that such an experiment will be draped with technocratic tools such as perpetual bonds.
ZIRP, QE, NIRP and now Helicopter Money reveals of how central bankers have become totally addicted towards the use of destructive runway inflationism.
Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, recently explained at the Marketwatch that “Central banks around the world have cut interest rates a combined 659 times since Lehman Brothers filed for bankruptcy on Sept. 15, 2008, resulting in negative rates in many major economies”, in addition, central banks’ holdings of financial assets to swelled to $24.6 trillion just “to prop up their economies by continuously funneling funds in to the system”. $24 trillion would account for about 32% of the global economy!
And global central banks will continue to push such policies to the limits with almost no prospects of backing off.
Proof? This week, the new governor of Bank Negara Malaysia unexpectedly chopped interest rates. While the Bank of England (BoE) left rates unchanged also during the week, the BoE’s chief’s economist expects of a “significant” and “material” package of action by the English central bank in August.
Such radical experiments only postulates to accidents waiting to happen anytime!
With the exception of 30 and 40 year, the entire yield curve of Japanese government bonds (JGBs) have all drifted to negative territory, this means that if Bernanke’s squadron of monetary choppers will succeed in the cash bombardment of the Japanese economy to ignite inflation, what this entails could be a crash in JGBs! (if not a crash in global bonds)
So be careful of what you wish for.
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