The Phaserl


Why Helicopter Money Won’t Push Stocks Higher

by Charles Hugh Smith, Of Two Minds:

In effect, helicopter money turns the entire economy into a Ghost City.

The possibility that Japan might launch helicopter money stimulus sent global stock markets soaring in a paroxysm of pleasurable anticipation. But exactly what is helicopter money and what connection does it have to stock valuations, if any?

Broadly speaking, helicopter money is government deficit spending that is directed to households rather than the financial sector. Deficit means the government doesn’t have extra cash to pay for the stimulus program–it borrows it by selling government bonds.

With interest rates near-zero or even negative, it doesn’t cost governments much to borrow huge sums from future taxpayers. All bonds are borrowed from future taxpayers, because somebody will have to pay back the principal, even if there are no interest payments due.

Typically, bonds that mature (i.e. the principal must be returned to the owner of the bond) are replaced with newly issued bonds. In other words, government debt never declines, as new debt is issued to replace bonds that come due AND to fund additional spending.

The nearest household analogy is a mortgage which you “pay off” by borrowing an even larger sum every few years. The debt just keeps getting larger as time goes on.

The assumption here is that there will be more of everything in the future: more taxpayers paying more taxes, more consumers consuming more, more workers being even more productive, more corporations earning even more profits, and so on: more, more, more, more.

More of everything means it will be easier to pay the debt we borrowed from future taxpayers. The economy will be larger, tax receipts will be higher and productivity will drive profits and consumption higher.

This assumption worked for a few hundred years, but now it doesn’t. In Japan (and many other nations are soon to tread the same path), population is declining and GDP, profits, productivity and tax receipts are all stagnating.

This raises the terrifying prospect that there won’t be more of everything in the future. If there is less of everything, sacrifices must be made to roll over the mountain of debt accumulated in the past, and it soon becomes impossible to do so.

Here’s the magic part of helicopter money: to avoid all the problems of ever-rising debt in a stagnating economy, the central bank creates money out of thin air and buys the government bonds with the newly created money.

This is called monetizing the debt as new money is created out of thin to buy the debt. No tax revenues are needed, and so no sacrifices must be made to accumulate more debt. All the helicopter money is in effect free money because nobody has to pay anything for it.

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1 comment to Why Helicopter Money Won’t Push Stocks Higher


    There are different kinds of debt instruments. Private debts are made when people go to the bank to create a new loan.

    This action makes a new debt instrument from nothing, and then the private banker buys the debt instrument from credit money they create from nothing.

    The government can create a TBill (bond really) and issue it into the primary market. In this case, the bond will attract existing money out of money supply. That money that it attracts found its source as private bank credit/debts.

    That new bond ultimately becomes an old bond over time, and then it is finds its way to the FED’s ledger. The FED’s swaps keyboard money it created for bonds trapped in bank reserve loops.

    There is a transmission path to the markets from FED through fed TBTF primary dealer banks. (They can make loans to buy TBill, and then hide the paper.)

    The FED rebates interest due on Tbill bonds held in its books. Yes, this is an elaborate shell game designed to confuse.

    But, consider that public debt interest is rebated, but private debts are NOT.

    The FED takes its profits, then pays off its corporate owners, then rebates Treasury.

    Public debts can be ignored, so the notion that these debt instruments (located on FED’s ledger) will recall their former credit from money supply, does not stand up to scrutiny.

    If helicopter money is created debt free from Treasury, and then spent into productivity channels – say on infrastructure, then it will go on to pay wages. In its path it will create wealth, employment, and then it will terminate itself as it pays down private debts.
    When banker credit returns to pay down principle of a loan, it disappears. What came from nothing returns to nothing.

    So, when there is balance sheet recession, meaning a lot of private debts, then exogenous money issued by treasury is actually the smart thing to do.

    This is what happened in WW2, especially line item public money issued by Reconstruction Finance Corporation. At the end of WW2, there were no significant private debts, as people had paid them down.

    Of course the best thing to do is to throw debt money system onto the ash heap pf history, and convert to honest sovereign money.

    Hugh Smith is only partially correct. Government can issue public debts, and have them monetized – this is called deficit spending. Helicopter money issued exogenously as treasury money, would be beneficial, and prolong the debt system by paying down private debts.

    Creating helicopter money can be done many ways – and the way the money is sourced and where it channels will predicate an output.

    We don’t know how they will do it, so Hugh Smith is doing nothing more than speculation, and more-so is confused on how actual monetary mechanics work.

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