The wonder is why anybody would think that government debt monetization would push stocks higher, because all the effects on the real economy of such monetization are negative. From Charles Hugh Smith at oftwominds.com:
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.
To continue reading: Why Helicopter Money Won’t Push Stocks Higher
“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.”
I can think of a nearer household analogy. A mortgage is backed by the collateral of your home. This is more like a stack of credit cards, the older ones being “paid off” with new and bigger lines of credit. And you’ve blown all the money with nothing to show for it. The only reason people keep loaning you money is the belief that your Ponzi scheme will outlive them.
Of course, even this analogy doesn’t address the fact that you can also keep making your credit card payments with currency you’ve magically pulled out of your ass.
I respect Charles, but I disagree with him on this.
The reason the bubble “worked” for so long is that debt was seen as an asset. The more Congress borrowed & squandered, the more wealth was perceived to grow. Notwithstanding occasional hand-wringing about the National Debt (and the astronomical size of the credit market), the worse things got, paradoxically the richer creditors felt.
How will this Debt Ocean be monetized (helicopter money?) Presumably with…more debt. See the problem?
Federal Reserve Notes (AKA banknote cash) cannot be used, because the size of the Bond Ocean relative to anything real is simply, mathematically absurd. Do. The. Math. There aren’t enough trees to print that much paper.
The REAL issue is rates. If rates begin to reflect nascent worry about future repayment conditions, attempting to issue more debt to provide the illusion of liquidity in a bond auction could have the paradoxical effect of driving rates higher, such that more capital value is destroyed among existing bonds than the Fed attempts to pump into the market.
The OCEAN of IOU-DOLLARS now in existence cannot be supported. 36-50 years of warping incentives for capital formation have doubtlessly hamstrung future real productivity.
All roads thus lead to a collapse in the wealth value of debt of all kinds, which should be the greatest monetary deflation in recorded history. It’s time will arrive when this largest ever game of chicken ends. By my calculations it’s 21 years overdue and counting.
Well said, and I agree with you.