James Bevan: Central banks in a spin
0There are some houses late to the debate suggesting that so-called “helicopter money” is the answer to the global economic challenges of low growth and inflation.
Returning to first principles, we have argued that one root cause of the current problems is that Asian economies, which have traditionally implicitly relied on cheap and plentiful credit, and sometimes cheap currencies as well, to subsidize their level of output and hence their levels of domestic employment, are pricing their goods at below their true cost prices.
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8th Local Authority Treasurers Investment Forum
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We go on to identify that in so doing they are forcing companies in those countries that do adhere to market rules to lose market share and/or drop out of production.
Some commentators suggest that the rise of these countries’ share of global trade is a case of comparative advantage, but actually it looks as if it is really the result of their non-profit maximising behaviour.
Our analysis is that even if developed markets and others adopt helicopter money, this situation is unlikely to change.
In fact, it would seem that the whole rather strange notion of helicopter money, if it were to occur, would simply represent another attempt by policymakers to hide the effects of this imperfection at the centre of the world trading system.
In terms of what the concept of helicopter money itself would really involve, a central bank could give everyone £10,000 in ‘cash’ but this would involve the central bank creating massive new liabilities (i.e. cash) for which it would have no matching asset.
Therefore, the central banks would see their own capital diminished by £10,000 for each person that received the money.
In the case of the Bank of Japan and those other central banks which are notionally private companies with external shareholders, it’s not all clear how this would work or whether it would even be legal, but even in the case of publically-owned central banks, the destruction of the central bank’s capital would in effect represent an immediate loss to their respective finance ministries that ultimately would need either further monetization or an increase in taxes to make good.
We might expect that if people believed that taxes would rise in the future as a result of helicopter money, they would probably simply save much of the money that they received, and if they began to worry about future inflation as a result of helicopter money, they might also start to save more so as to protect the future value of their real wealth in an ultra-low rate environment.
In addition, the even lower rates might damage the banking systems further. Hence we can conclude that helicopter money would be unlikely to create a sustainable recovery.
In effect, helicopter money would simply represent central banks borrowing from themselves in order to give people more money to spend today but, as so-called neo-classical economists know, and (former) central bank governors Shirakawa and King have also been explaining recently to those that are still willing to listen, it only makes sense to borrow from the future if the future will be brighter than the present.
Therefore helicopter money would only work if it was accompanied by genuine structural reform within the world trading system that made the future look brighter.
Against this backcloth, investors should be prepared to pay higher prices for participation in genuine ongoing secular growth – hence the need for a continued focus on quality growth as an investment style.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
*CCLA is a supporter of Room151
