Fifteen years ago a Japanese equity fund manager told me that Japan was merely “the dress rehearsal”, while “the rest of the world will be the main event”, says MoneyWeek’s Tim Price in his PFP Wealth Management newsletter. He thought Japan was becoming “a giant laboratory experiment for novel monetary policies” that were going to spread to the rest of the world.
That seemed absurd back then, but “today, not so much”. Quantitative easing (QE), or money printing, has indeed spread to other major developed economies. And now Japan may be about to spearhead an even more radical monetary policy: helicopter money.
Also referred to as “people’s QE”, or “direct monetisation”, it basically means printing money for the government to distribute as it sees fit, with no obligation to repay the cash. In other words, it may as well be thrown out of a helicopter window. This can take various forms: one widely mooted idea is to forgive student debts, for example. (For a variation on these ideas, see Merryn Somerset Webb’s interview with Steve Keen.)
The key difference between this and the QE we have seen so far is that the latter is – theoretically – temporary and reversible. With QE, the central bank injects cash into the economy by buying bonds with printed money. Once growth returns, the central bank gradually sells the bonds it has bought back onto the market, unwinding the emergency policy. But with helicopter money, the cash has permanently entered the system.
You can see why Japan is contemplating helicopters. Its “current monetary policy seems to have run its course”, says The Wall Street Journal’s Anjani Trivedi. Negative interest rates, supposed to stimulate activity, have merely unnerved investors because they imply lower bank profits and less lending.
Meanwhile, the Bank of Japan is running out of bonds to hoover up: it is already set to absorb all of this year’s issuance, says the Lex columnist in the Financial Times, “sapping liquidity and increasing volatility”. More broadly, while QE in Japan and elsewhere has blown up asset bubbles, it has had scant impact on lacklustre economies.
As we noted earlier this year, the move to helicopter money is merely the point at which the authorities stop pretending that QE is temporary: given the economy is still struggling, few believe central banks are going to sell their bonds back to the market in the foreseeable future. Any sign of a renewed downturn with interest rates still at zero would be a handy excuse to discard the fig leaf.
So then what? We could end up with a surge in inflation of Weimar proportions, as prices jump and central banks are too slow to raise interest rates; or inflation may not appear at all, with the state buying up the entire economy in an ever more desperate attempt to generate it. Whatever happens, we are through the looking glass – and moving further away from post-war economic normality.