The “Foreign Affaird” publication of the influential and policy-setting Council of Foreign Relations made an announcement that could have huge ramifications for monetary policy going forward. In an article titled “Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People,” the authors argue that the current quantitative easing and debt monetization is not generating broad-based stimulus to the economy.
To some extent, low inflation reflects intense competition in an increasingly globalized economy. But it also occurs when people and businesses are too hesitant to spend their money, which keeps unemployment high and wage growth low. In the eurozone, inflation has recently dropped perilously close to zero. And some countries, such as Portugal and Spain, may already be experiencing deflation. At best, the current policies are not working; at worst, they will lead to further instability and prolonged stagnation.
Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.
This is a huge announcement because it would lead to a major increase in the velocity of money. While a tremendous amount of money was created following the financing crisis, it has yet to result in significant inflation as a good amount of it remains parked in excess reserves and in corporate accounts. This has brought the velocity of money to the lowest levels in decades.
But if these funds start flowing through the economy, we could see inflation pick up at a much faster pace than anyone anticipates. And this will be the fire that ignites the gold market and pushes prices to new highs. Men are fallible, even the economic Gods that believe they can control the economy better than free markets. If they fail to keep inflation in check, make one small miscalculation, use a faulty model or rely on incorrect assumptions, things can spiral out of control.
This is the inevitable result of allowing a bunch of politicians and bankers to control the money supply, bail out banker buddies, tilt the playing field to benefit their donors and middle with a system to the point that is no longer resembles any type of free market. They have created the illusion that they have been successful and used the mainstream media to reinforce this belief in the populace. But all they have really done is sweep the dirt under the rug and kick the can down the road a bit further.
I would prefer to see less intervention from the FED and Washington. I believe that although the pain may have been more severe initially, the economy would be healthier today if they allowed the banks to fail following the 2008/2009 financial crisis. The bad debt and mal-investment would have been properly liquidated, smaller businesses would have stepped in to fill the void with sounder business practices and we would not have the moral hazard prevalent today. The big banks have not made significant changes to de-risk or de-leverage their balance sheets. They were not broken up and remain too big to fail, too big to jail and too important to political fundraising to discipline. They represent a major threat to the global economy. The United States merely patched its financial sector back together and resumed the same policies that created 30 years of financial bubbles. The derivatives time bomb is still ticking and bank balance sheets remain inflated, obscured and not properly marked to market.
But if the FED is going to step in and stimulate the economy with taxpayer funds (current or future via inflation), the money would be better directed towards the poor and middle class, rather than the banks and ultra-rich. The result of bailing out the banks and inflating the stock market and housing market has been to further increase the wealth gap in America. The rich have grown richer, the poor have become poorer and the middle class has been increasingly destroyed. Giving more money to the wealthiest in society does not stimulate growth or consumer spending. While I don’t have favor higher taxation, trickle down economics was a cruel joke and false justification for allowing the rich to grow richer and more powerful. It didn’t work and still doesn’t.
If the government and FED are to follow the suggestion of the CFR and start dropping cash in the hands of consumers rather than banks, we risk the potential of hyperinflation. This is especially true given the increasingly de-dollarization of the global economy and recent moves by China and Russia to eliminate the dollar in their trade deals.
One should not blow off this suggestion by the CFR simply because it seems too far from current policy. Almost all of America’s leadership has come from this small group. That includes our presidents and their advisers, cabinet members, ambassadors, board members of the Federal Reserve System, directors of the largest banks and investment houses, presidents of universities, and heads of metropolitan newspapers, news services, and TV networks.It is not an exaggeration to describe this group as the hidden government of the United States.
While it may seem counter-intuitive on the surface, CFR members have never been shy about calling for the weakening of America as a necessary step toward the greater good of building world government. One of the CFR founders was John Foster Dulles, who later was appointed Secretary-of-State by CFR member Dwight Eisenhower. In 1939, Dulles said:
Some dilution or leveling off of the sovereignty system as it prevails in the world today must take place … to the immediate disadvantage of those nations which now possess the preponderance of power…. The establishment of a common money … would deprive our government of exclusive control over a national money…. The United States must be prepared to make sacrifices afterward in setting up a world politico-economic order which would level off inequalities of economic opportunity with respect to nations.
CFR member Zbigniew Brzezinski was the National Security Adviser to CFR member Jimmy Carter. In 1970, Brzezinski wrote:
… some international cooperation has already been achieved, but further progress will require greater American sacrifices. More intensive efforts to shape a new world monetary structure will have to be undertaken, with some consequent risk to the present relatively favorable American position.
This idea of stimulating the economy via providing cash directly to consumers may just be a trial balloon at this point, but I expect the idea to gain traction. I also we could also see Yellen make changes to increase bank lending and discourage them from parking money in excess reserves via lower the rate paid on these funds.
The recent dollar strength on anticipation of rates increasing sooner than expected is not likely to last. The FED can not raise rates significantly without crashing the stock market and throwing the economy into a tailspin. The slowing housing recovery would come to stand still and possibly reverse course. But even more importantly, the government debt would be nearly impossible to service. Inflation remains low for now and employment is weak. Raising rates given the failure of these two FED mandates makes little sense. So, I expect rates to remain low much longer than the current consensus estimates.
When the realization that low rates are here to stay sinks in, the recent downward pressure on gold should be alleviated and prices should rise. If the government and FED adopt the changes mapped out by the CFR, it won’t be long before inflation picks up and eventually explodes faster and farther than policymakers anticipate. As wild as it sounds, we may start seeing the FED drop newly-printed fiat notes from helicopters in order to finally get the economy moving, improve the employment market, spur consumer spending and raise the inflation rate closer to guidance.
Given this outlook, I believe it is wise to continue accumulating precious metals and quality mining stocks on the dips. These discount prices will not be around for much longer.
Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People
From Foreign Affairs, by Mark Blyth and Eric Lonergan
In the decades following World War II, Japan’s economy grew so quickly and for so long that experts came to describe it as nothing short of miraculous. During the country’s last big boom, between 1986 and 1991
, its economy expanded by nearly $1 trillion. But then, in a story with clear parallels for today, Japan’s asset bubble burst, and its markets went into a deep dive. Government debt ballooned, and annual growth slowed to less than one percent. By 1998, the economy was shrinking.
That December, a Princeton economics professor named Ben Bernanke argued that central bankers could still turn the country around. Japan was essentially suffering from a deficiency of demand: interest rates were already low, but consumers were not buying, firms were not borrowing, and investors were not betting. It was a self-fulfilling prophesy: pessimism about the economy was preventing a recovery. Bernanke argued that the Bank of Japan needed to act more aggressively and suggested it consider an unconventional approach: give Japanese households cash directly. Consumers could use the new windfalls to spend their way out of the recession, driving up demand and raising prices.
As Bernanke made clear, the concept was not new: in the 1930s, the British economist John Maynard Keynes proposed burying bottles of bank notes in old coal mines; once unearthed (like gold), the cash would create new wealth and spur spending. The conservative economist Milton Friedman also saw the appeal of direct money transfers, which he likened to dropping cash out of a helicopter. Japan never tried using them, however, and the country’s economy has never fully recovered. Between 1993 and 2003, Japan’s annual growth rates averaged less than one percent.
Today, most economists agree that like Japan in the late 1990s, the global economy is suffering from insufficient spending, a problem that stems from a larger failure of governance. Central banks, including the U.S. Federal Reserve, have taken aggressive action, consistently lowering interest rates such that today they hover near zero. They have also pumped trillions of dollars’ worth of new money into the financial system. Yet such policies have only fed a damaging cycle of booms and busts, warping incentives and distorting asset prices, and now economic growth is stagnating while inequality gets worse. It’s well past time, then, for U.S. policymakers — as well as their counterparts in other developed countries — to consider a version of Friedman’s helicopter drops. In the short term, such cash transfers could jump-start the economy. Over the long term, they could reduce dependence on the banking system for growth and reverse the trend of rising inequality. The transfers wouldn’t cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them.
In theory, governments can boost spending in two ways: through fiscal policies (such as lowering taxes or increasing government spending) or through monetary policies (such as reducing interest rates or increasing the money supply). But over the past few decades, policymakers in many countries have come to rely almost exclusively on the latter. The shift has occurred for a number of reasons. Particularly in the United States, partisan divides over fiscal policy have grown too wide to bridge, as the left and the right have waged bitter fights over whether to increase government spending or cut tax rates. More generally, tax rebates and stimulus packages tend to face greater political hurdles than monetary policy shifts. Presidents and prime ministers need approval from their legislatures to pass a budget; that takes time, and the resulting tax breaks and government investments often benefit powerful constituencies rather than the economy as a whole. Many central banks, by contrast, are politically independent and can cut interest rates with a single conference call. Moreover, there is simply no real consensus about how to use taxes or spending to efficiently stimulate the economy.
Steady growth from the late 1980s to the early years of this century seemed to vindicate this emphasis on monetary policy. The approach presented major drawbacks, however. Unlike fiscal policy, which directly affects spending, monetary policy operates in an indirect fashion. Low interest rates reduce the cost of borrowing and drive up the prices of stocks, bonds, and homes. But stimulating the economy in this way is expensive and inefficient, and can create dangerous bubbles — in real estate, for example — and encourage companies and households to take on dangerous levels of debt.
That is precisely what happened during Alan Greenspan’s tenure as Fed chair, from 1997 to 2006: Washington relied too heavily on monetary policy to increase spending. Commentators often blame Greenspan for sowing the seeds of the 2008 financial crisis by keeping interest rates too low during the early years of this century. But Greenspan’s approach was merely a reaction to Congress’ unwillingness to use its fiscal tools. Moreover, Greenspan was completely honest about what he was doing. In testimony to Congress in 2002, he explained how Fed policy was affecting ordinary Americans:
“Particularly important in buoying spending