Willem Buiter - Only Helicopter Money Can Save The World

[interestrateripoff]

http://www.zerohedge.com/news/2015-08-29/citigroup-chief-economist-thinks-only-helicopter-money-can-save-world-now

Having recently explained (in great detail) why QE4 (and 5, 6 & 7) were inevitable (despite the protestations of all central planners, except for perhaps Kocharlakota - who never met an economy he didn't want to throw free money at), we found it fascinating that no lessor purveyor of the status quo's view of the world - Citigroup's chief economist Willem Buiter - that a global recession is imminent and nothing but a major blast of fiscal spending financed by outright "helicopter" money from the central banks will avert the deepening crisis. Faced with China's 'Quantitative Tightening', the economist who proclaimed "gold is a 6000-year old bubble" and cash should be banned, concludes ominously, "everybody will be adversely affected."

China has bungled its attempt to slow the economy gently and is sliding into “imminent recession”, threatening to take the world with it over coming months, Citigroup has warned. As The Telegraph's Ambrose Evans-Pritchard reports, Willem Buiter, the bank’s chief economist, said the country needs a major blast of fiscal spending financed by outright "helicopter" money from the bank to avert a deepening crisis.

Speaking on a panel at the Council of Foreign Relations in New York, Mr Buiter said

the dollar will “go through the roof” if the US Federal Reserve lifts interest rates this year, compounding the crisis for emerging markets.

"

So why it matters is that the competence of the Chinese authorities as managers of the macro economy is really in question

- the messing around with monetary policy, the hinting on doing things on the fiscal side through the policy banks. But I think

the only thing that is likely to stop China from going into, I think, recession

- which is, you know, 4 percent growth on the official data, the mendacious official data, for a year or so

- is a large consumption-oriented fiscal stimulus, funded through the central government and preferably monetized by the People’s Bank of China.

Well,

they’re not ready for that yet. Despite, I think, the economy crying out for it, the Chinese leadership is not ready for this.

So I think they will respond, but

they will respond too late to avoid a recession,

and which is

likely to drag the global economy with it down to a global growth rate below 2 percent, which is my definition of a global recession

. Not every country needs go into recession. The U.S. might well avoid it.

But everybody will be adversely affected

."

Mr Buiter had some more to add on the idiocy of Chinese Equity markets. He said the stock market crash in Shanghai and Shenzhen...

...is a sideshow.

Consumption effects, you know, wealth effects, minor.

Almost no capex in China is funded through share issue. And so it is a symbol of the policy failure rather than intrinsically economically important.

China’s problems are excessive leverage in the corporate sector, in the local government sector, and the very fragile banking system, and shadow banking system.

As Chen pointed out, it won’t be allowed to collapse because it is underwritten by the government, but it won’t be a source of great funding strength.

There is excess capacity and a pathetically low rate of return on capital expenditure, right?

Invest 50 percent of GDP and get, even in the official data, 7 percent growth. The true data is probably something closer to 4 ½ percent or less.

So it is an economy that, I think, is sliding into recession.

And what the stock market reminds us of, I think, especially this sequence of the

government first cheerleading the stock market boom and bubble

- because quite

a few of the local pundits believed that this was a great way of deleveraging without paying for the corporate sector, to have a stock market bubble

. And then, of course, the

rather panicky and incompetent reaction in response.

So, once again, why it matters is that the competence of the Chinese authorities as managers of the macro economy is really in question.

Von Mises stated that “there is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved”.

Its clear the lunatics want total monetary collapse. Free money isn't going to sustain long term demand, the economy will get a sugar rush boost and then slip back into a deeper slumber, requiring an even bigger monetary boost the next time round.

It's a pity all the truly great economists are dead, a round table discussion with the likes of Von Mises, Hayek, Keynes, Minsky and Galbraith would be great TV, as I'm sure none of them would be impressed with the current shower of 5h1te we have now.

[Errol]

Lunatic. Should be locked up in an asylum.

[FIGGY]

He is we just call it the city

[billybong]

He's touting a solution that's already failed according to the recently publicised research. Ok QE hasn't been full on helicopter money but there's already been the things like PPI compensation and so on.

The way the US (and now Opec and a few other countries) has been increasing oil output they could be intending to use cheap oil as stimulus.

Edited August 30, 2015 by billybong

[yellerkat]

When he was still writing for the FT back in 2008/09 he was advocating massively negative interest rates on bank balances.

People pointed out that would lead to instant currency repudiation. Then he went silent.

[zugzwang]

He's touting a solution that's already failed according to the recently publicised research. Ok QE hasn't been full on helicopter money but there's already been the things like PPI compensation and so on.

Not if you divide the economy into two sets of prices: assets prices and current prices (including wages). QE has helped inflate the former but generally suppressed the latter. Helicopter drops would target the latter, driving up interest rates and collapsing asset prices in the process. Naturally, a hyperinflationary reset would leave the country vastly poorer than before but the debt at least could be put back on a sustainable trajectory relative to incomes.

[Guest]

Such an 'hyperinflationary reset' would be the final insult.

Everyone who bid up house prices out of my reach gets an implicit bailout as their debts disappear relative to hyperinflated wages. And the money I've spent ten years carefully saving away trying to keep up with the madness becomes worthless. Once again homeowners win and I lose.

Didn't Gordon Brown already 'save the world'? Why does it need saving again?

[frederico]

Please sir, please sir, I want it all for free..

[billybong]

Not if you divide the economy into two sets of prices: assets prices and current prices (including wages). QE has helped inflate the former but generally suppressed the latter. Helicopter drops would target the latter, driving up interest rates and collapsing asset prices in the process. Naturally, a hyperinflationary reset would leave the country vastly poorer than before but the debt at least could be put back on a sustainable trajectory relative to incomes.

It would be a different type of failure, more visible and even with a track record of failure - to the extent that Buiter seems to be proposing it. Although QE has failed at least some of the stats have recently seemed to show a bit of recovery although a fake recovery. Imagine how people will be feeling being photographed and on video with their wheelbarrows full of worthless money etc.

It would be very controversial and openly controversial at least to the extent that Buiter seems to be proposing it. Even the newspapers would be picking up about stuff like Weimar as the inflation started to increasingly pick up.

For the moment they'll be looking for something that stands a chance of showing that their QE/ZIRP policies have already been a success (statistically according to the fake statistics) and confirms their bullishness on interest rates as the US Presidential election approaches.

Edited August 30, 2015 by billybong

[billybong]

If they are expecting the low oil price to substitute for QE/ZIRP in stimulating the economy expect the BoE to start issuing their fan charts predicting high inflation in 2 years time to justify higher interest rates etc to mop up any spare money anyone might have as a result of low oil prices. Turning policy on a sixpence with the oil price.

As house prices have roughly followed the oil price trend patterns for some decades then last year/early this year could indeed turn out to have been an awful time to have bought at the current crazy price levels - especially in London,

Edited August 30, 2015 by billybong

[dryrot]

" Citigroup's chief economist Willem Buiter"

Of course, the banker's solution. Bail out Citi with heli-money...

[WideAsleep]

Such an 'hyperinflationary reset' would be the final insult.

Everyone who bid up house prices out of my reach gets an implicit bailout as their debts disappear relative to hyperinflated wages. And the money I've spent ten years carefully saving away trying to keep up with the madness becomes worthless. Once again homeowners win and I lose.

If you know that is the outcome in such a situation why do you save in currency?

[Guest]

If you know that is the outcome in such a situation why do you save in currency?

If you're asking why I don't buy gold, it's because selling gold is not quite as easy as buying it, and - being a renter - I don't have a secure place to store it. Historical sentiment aside, gold doesn't actually have intrinsic worth beyond its industrial applications. You can't eat it and you can't build a house with it.

If you're asking why I don't buy a house, it's because houses are stupidly expensive and I'd need to take on an irresponsible amount of debt.

If sanity is ever to return to our economic system asset prices have to fall back to somewhere nearer historical norms. Otherwise - soon! - entire generations will have been priced out, and in that case what's been the point in working and saving anyway? Hyperinflation and default is not a real solution and if it ever gets that far then it will be a betrayal of ordinary people on the part of our leaders bigger than any since the war. Political change has to happen eventually - people have surely noticed by now that the living standards they've inherited are not the same as those their parents enjoyed.

Also, I thought capitalism was supposed to be ruthless and uncaring. The value of your investment can fall as well as rise, that kind of thing. Instead central banks seem to be determined that no investor ever truly loses.

So maybe they will just print and print and print in order to make sure the numbers keep ticking upwards. If they're determined to completely decouple their so-called 'markets' from the real economy and in the process destroy the value of money, I'm really not sure what I'm supposed to be able to do to protect myself.

I've only been trying to save because I want to buy a half-decent flat. I shouldn't have to act like an international hedge fund in order to manage that, even if it's looking like I'll need to save a hedge-fund's worth of deposit by the time this is all over.

[gf3]

Steve Keen and Adair Turner seem to agree with him. I don't think either of them are somebodys fool.

[Guest_northshore_*]

When he was still writing for the FT back in 2008/09 he was advocating massively negative interest rates on bank balances.

People pointed out that would lead to instant currency repudiation. Then he went silent.

He went the opposite of silent: http://willembuiter.com/public.htm

[yellerkat]

He went the opposite of silent: http://willembuiter.com/public.htm

That looks just like the first website I set up in 1995! With Notepad...

[gf3]

Disagree. Both those guys are notable advocates of debt forgiveness.

Debt forgiveness in all its forms, actual or ultra low rates etc. Merely benefit the rich and increase inequality despite purporting to help "poor borrowers". The most indebted are the richest....those with assets to leverage.

Can't really see how you can say that about Keen. His idea is a modern day jubilee where everybody gets £5,000 but if you have debt you have to pay it off. For those with millions in saving (or millions in debt) This wouldn't touch the sides. Those with modest savings (or modest debt) would benefit most. It would help to bring a more equal society.

[XswampyX]

.....

He advocates printing it. And ultra low, if not negative interest rates. The net effect will be to inflate the assets of the rich and to allow imbalanced trade to continue without fundamental reforms to the trading system.

Exactly, the rich would buy more assets and the poor would have to rent them. When it all goes tits-up.... well blow me the rich have all the assets and we start it all again.

We should have an interest rate fixed on a sine wave from %0 -> +%5 over 10 years. That will shake the tree.

[spyguy]

Let me re-write this:

'Only helicopter money can save the economic model that is my income'

[gf3]

Where would the money come from?

I advocate re-distribution and full reserve banking. And to restore capitalism with an interest rate. I advocate a system of balanced trade.

He advocates printing it. And ultra low, if not negative interest rates. The net effect will be to inflate the assets of the rich and to allow imbalanced trade to continue without fundamental reforms to the trading system.

Re-distribution would be best done with LVT and IHT

Full reserved banking I agree

If we had full reserve banking I don't think there would be a bank of england base rate just a free market rates.

Not sure about balanced trade across sea borders finance doesn't stop at sea borders. ( a British pension company may own shares in German companies)

[interestrateripoff]

Can't really see how you can say that about Keen. His idea is a modern day jubilee where everybody gets £5,000 but if you have debt you have to pay it off. For those with millions in saving (or millions in debt) This wouldn't touch the sides. Those with modest savings (or modest debt) would benefit most. It would help to bring a more equal society.

£5000 for a large number mortgages holders wouldn't make much difference, a £100k mortgage would only get a 5% reduction, a £200k it's a 2.5% reduction. Considering the debt levels in the UK this really wouldn't achieve very much.

I'd rather see a percentage reduction, although the uber rich who are leveraged then there must be a wealth sacrifice to compensate for the reduction.

[oracle]

they are missing the point.

it's not currency debasement that is causing all the trouble.

it is stupid micromanagement and endless legislation for pointless things(like regulations for curvature of bananas/smoking bans etc)

endless legal hoops causes capital flight, which inturn causes currency debasement(for two reasons....one because productive jobs go offshore,and two, because the government have to paper over the cracks to make things look not as bad as they really are.).

and the problem with the high regulation environment, is that everybody is now "guilty until proven innocent"...so you have reams and reams of paperwork/fees to obtain permits and licences for stuff you should be able to do of your own accord(think bedroom tax, HIP's)

THAT, in essence,is why the EU is a failure..because the top brass in the organisation HAVE ALL BEEN EDUCATED in environments where that is the modus operandi...and they will swear unquestioning fealty(even if the orders are wrong), to an omnipotent caesar/emperor....

they very much see themselves in the role of "priesthood",and you,little people, are ignorant serfs, just like you were before the reformation.

the people of the EU were not consulted on such a hierarhical/oligarhichal system, and most will not give their consent if the plan of the elites if brought to public view(which the powers that be do not at all want).

it's anglo-saxon common law versus roman canon law...and common law wins.

Edited August 31, 2015 by oracle

[stormymonday_2011]

I would have a variant of Keynes' system. He suggested a series of fixed bilateral exchange rates that would be altered according to the balance of trade.

I would simply reference a central index and allow a country to devalue by formula if their visible trade is in negative territory, leaving any adjustment for a persistent trade imbalance up to the deficit country. i.e. don't allow capital flows to stop the necessary adjustment to exchange rates and trade whereby surplus countries pump capital back into target countries rather than trading in balance. That way a country can come back into balance in total rather than being in balance with every country with whom it has a bilateral exchange rate.

Of course, the banks would hate such a system because it stops the lucrative but ultimately pointless fx trade.

Companies in surplus countries would need to think harder about what they do to maintain demand and competitiveness...like locating factories in deficit countries (with cheap exchange and lower costs) to create demand rather than lending them money to keep the ultimately doomed game of mercantilism alive.

This is pretty much the arrangement that Keynes and the British government tried to have implemented at Bretton Woods. It failed mainly due to US resistance as they wanted the dollar to be the world reserve currency for obvious political and economic reasons. It makes more sense than ailing currency unions like the Euro which appear just to have magnified the problems of trade imbalances in Europe.

[evetsm]

Buiter knows only one thing, more of the same that got us to where we are. Every place he says China, just insert The West.

The man is shameless, and clueless.

"gold is in a 6000 bubble" can anyone spot the sheer stupidity of that statement ? Would that one fiat currency, nay ANY currency, even survive for 1/10 of 6000 years !

[Silverfinger]

And the money I've spent ten years carefully saving away trying to keep up with the madness becomes worthless.

You might want to read the gold thread every now and then.