By Wilfred Hahn, Chairman & co-CIO
We refer to a rather astounding article that was published in the recent Fall issue of Foreign Affairs. This is a respected “highbrow” journal of reviews on geopolitics and political economy. Lots of it falls into the hum-drum category (good as sleeping pills). Yet, it is a forum that can sponsor or raise awareness of changing ideas and policies.
Such is the recent article entitled Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People by Mark Blyth and Eric Lonergan. The former is a professor at Brown’s University and the latter, a hedge-fund manager.
Their article may very well set a secular high-mark for felicitous monetary snake oil. That said, it cannot be ignored. Why? Because people sometimes willingly want to be fooled and policymakers are increasingly desperate to pump prime economic growth.
Here some brief extracts on their proposed “give money” schema:
“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.”
“The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income.”
“Most economists agree that cash transfers from a central bank would stimulate demand.”
“Central bankers could ramp [cash transfer/giving] up whenever they saw fit and raise interest rates to offset any inflationary effects, although they probably wouldn’t have to do the latter.”
“[…] an infusion of cash equivalent to two percent of GDP would likely grow the economy by about 2.6 percent.”
“Using cash transfers, central banks could boost spending without assuming the risks of keeping interest rates low.”
“[…] it makes no sense to worry about the solvency of central banks: after all, they can always print more money.”
As our clients and readers will know, we have been tracking the developing consensus on “money finance” policy prescriptions such as OPMF (Overt Permanent Money Finance. See past articles … i.e. When and What if a “Money Finance” Boost?) Mentioning terms like this, we are sure to sound “hum-drum,” too. The only difference is that policies such as outlined above have the potential to decimate your pocketbook (your relative wealth) and transform entire societies (this already having been the case in part). It’s potentially explosive “hum-drum.”
“Give Money Directly to the People” reminds us of a similarly fanciful and dangerous article published back in the 1996 Fall edition of Foreign Policy magazine, entitled Securities: The New Wealth Machine by John C. Edmunds. Reading it, we remember being appalled. Its focus was entirely upon validating the panacea of inflating assets values (i.e. securities like stocks and bonds) without any consideration of underlying income generation of any kind.
Basically, the notion was that if you blow up a loaf of bread (with copious doses of monetary yeast) it will make everyone feel as if there is more food (i.e. real wealth) and therefore hopefully also to consume more.
Yes, but what of the real underlying income growth? Everybody knows that an inflated loaf of bread will not have one single more calorie of nutrient in it. Apparently some macro-economists don’t know this or think their economic witch-doctoring belongs to the metaphysical realm. We knew that economics wasn’t a science, rather belonging to the arts … but now it presumes to multiply “loaves and fishes”?
We do think that all major central banks will ultimately carry out “money finance” types of policies. What we mean is that the European Central Bank will do so, joining the ranks of the U.S. Fed, the Bank of England and the Bank of Japan. We think that they have been conducting stealth OPMG already for some time. At some point, much more is yet to come we think.
What will be the result of the “money finance” and “give money” policies? Well, it cannot end well. Let’s get that point out of the way right at the outset. It would be impossible to have any other outcome. To think otherwise would be to repudiate the foundations of mathematics.
But, the course to that destination is nuanced. It stands to be marked by an assortment of financial bubbles and huge wealth transfers that will appear enticing and seemingly free of consequence. It is policies like “give money” that further imbalance wealth distribution and further elevate the fortunes of the 1%. Policies such as these lead to instability.
The authors have this to say about inequality in their plan:
“Over the long term, they could reduce dependence on the banking system for growth and reverse the trend of rising inequality.”
“There is another way: instead of trying to drag down the top [the rich], governments could boost the bottom [spending of the poor].”
These expectations couldn’t be more wrong. Asset inflation primarily accrues to those that already are already wealthy. Economic growth in excess of savings growth will tend to end up in the hands of business owners. Consider that the most wealthy 5% of households in the U.S. own 65% of equities.
So much for the “give cash” idea. But that is not all. Here comes the “let them eat cake” part of their thinking.
“Best of all, the system would be self-financing. Most governments can now issue debt at a real interest rate of close to zero. If they raised capital that way or liquidated the assets they currently possess, they could enjoy a five percent real rate of return—a conservative estimate […].”
Not only can “giving cash” boost economic growth, we are to believe that by capturing this in the form of equity investments, that central banks can profit on the deal. This surely is fanciful. For that to occur over the long-term, equity capitalizations must grow faster than nominal GDP … forever. (This is so farcical we must ask: Who are these authors working for?)
As an investor, what to do? While real economic growth will likely remain relatively muted and deflationary biases will result from such wanton “money finance” monetary policies, one needs to be exposed to the asset types that benefit from financial inflation. One must invest like the 1% and that means staying invested in long-dated financial assets such as equities … most of the time.
We have often used the image of deep sea vents to explain how assets and people closest to the source of new money are the primary beneficiary of their warm and nutrient-rich flows.
But, there will be crises along the way as has already been the case (see Global Financial Crises). Every now and then, the pigs need to be herded back into the pen. The exact timing of these events is difficult to predict. That said, risk-taking has again become very expensive … much as we also noted back in 2006 and 2007. How long to stay at the trough before the farmer carries his herd off to the abattoir?
In conclusion, what comes around goes around. It is “snake oil season” once again. The carpetbaggers, charlatans and alchemists are again about. Crucially, investors must understand the scale of the fantastical delusion that is again propounding mismatched risks and pied piper expectations.
According to the authors, a great new future awaits. Apparently, at long last they have found the Perpetual Prosperity Machine.
“[…] in contrast to interest-rate cuts, cash transfers would affect demand directly, without the side effects of distorting financial markets and asset prices. They would also help address inequality—without skinning the rich.”
Eureka! Who wouldn’t want to believe in such claims?
We will try not to be carried away with these latest sophistries.
Categorised in: Blog
This post was written by rdechevigny