We live in an upside down world, where investing is dead (and these days means merely buying what the Fed will buy as the world’s largest asset manager was kind enough to explain), where billionaires who benefited from the Fed’s generosity for over a decade are shocked, shocked to learn there was moral hazard (and bailouts) going on here, and where helicopter money is now the norm. This Helicopter money, or as it is known in polite socialist circles MMT (Magic Money Tree, More Money Thanks, etc), and is based on a brilliant idea popularized by Baron Munchausen which appeals to those who have never actually traded or seen a bond bear market, presents some fascinating oddities, such as for example what we are seeing in the US right now: an economy sliding into a depression where tens of millions are getting laid off every week offset by a “market” that is approaching all time highs on trillions in central bank purchase of risk assets.
Some of these oddities prompted Rabobank’s Michael Every to take the logical absurdity that is helicopter money and ask a rather pertinent question: if taken to its logcal or rather absurd extreme, does helicopter money mean that we will soon have a world where everyone loses their jobs and is paid to do nothing, while “everything still remain happy in markets because the Fed will just keep setting the price of assets?” Luckily, Every answers his own rhetorical question and says that “we tried that from the 1930s up to 1991 (“We pretend to work and they pretend to pay us”) and it didn’t work out so well for those on the receiving end of it.”
His entire excerpt below:
Major sovereign bond yields are ultra-low and not going anywhere for years – so the pressure is off; US high risk credit is now far less high risk given it has a Fed backstop (and what doesn’t?); and equities are back in bull market territory in many locations. That is partly on the back of a steady drum-beat of stories about when economies currently under lockdown are re-opened – which may not be too far away. How this workable when universal testing is still absent, high-tech contact tracing is just being rolled out, if the summer heat might not kill Covid off, and when the virus might be mutating ahead of what is already the most rapid vaccine development in history remains to be seen.
Equally, however, markets are ecstatic because there is no need to actually do any thinking at the moment. The Fed has made clear that there are to be no losers – or at least that one does not have to bother trying to pick the winners. As in the infamous scene in the movie ‘When Harry Met Sally’, all that markets need to do to make money is to say “I will have what the Fed is having.”
How much further can we take the dichotomy of bull markets as we head to 10%, 15%, or perhaps 25% unemployment? Let’s test the structure in a teleological manner. Can everyone lose their jobs or be paid to do nothing, and all activity stop except that of the government, but everything still remain happy in markets because the Fed will just keep setting the price of assets? I believe we tried that from the 1930s up to 1991 (“We pretend to work and they pretend to pay us”) and it didn’t work out so well for those on the receiving end of it.
Yes, via MMT and helicopter money we could potentially see a ‘Sit For Victory’ war-economy that pays most people to stay at home until a vaccine is eventually rolled out alongside universal testing – but only in the richer members of the OECD. Emerging markets are not going to be able to do the same financially or practically… Consequently, as the BIS argue, they are going to be forced to beg for USD liquidity – and soon. On which front, we hear that there is a split in the G-7 over how the IMF is to respond. There is agreement that a limited debt moratorium will be offered to struggling economies, which is better than nothing.
To this, all we can add is a question we have been asking every since the start of QE1 when we predicted precisely how this would all play out (to its logical QEternity extreme where one round of monetary stimulus results in another round, and then another, each of which greater and more powerful than the last, until finally there is nothing left for the Fed to buy), namely if the Fed will indeed monetize all the debt as it is doing now, then why does anyone still pay their taxes?
After all, there is no greater stimulus program than doing away with the Federal Income Tax, which the US existed without – and thrived – until 1913, a year that shall live in infamy but not because it spawned the 16th Amendment, but because that’s when the Federal Reserve was created.
We are confident the two events are purely coincidental.