Helicopter Money…increasingly likely if growth continues to slow….

Helicopter money is essentially central bank financed government expenditure: Central Bank issues money to buy government debt, government uses money to fund, inter alia, tax breaks and/or infrastructure spending.

China is transitioning to slower growth, Japan remains mired in slow growth/demographic decline, European growth rates remain constrained as does US growth and there are problems in other key economies, notably Brazil and Russia.  As this pattern remains in situ, the risks to the financial system rise higher and so do the chances of “helicopter money”.

US real per capital GDP growth based on high water mark analysis


US Nominal GDP profile: rolling average quarterly change in GDP less inventories and Consumer Credit


Annualised real GDP growth Japan over rolling 10 year periods:


The same for Japanese household consumption:


Euro Zone real growth rates: annualised over rolling 5 and 10 year time frames: image

And the same for household consumption:


In the past, asset markets have typically reacted to late cycle interest rate rises as monetary policy looked to restrain growth in the face of increasing production/supply bottlenecks.  Asset markets would increase their preference for money relative to other assets, asset market leverage and consumption/production focussed loan growth would scale back; the economy would move into a “step back” or so called recession.  But, this retracement of markets and the stutter in monetary and economic growth was usually a short term phenomena: populations, technology, productive capital, and loans were in an expansionary phase.  Growth rates of populations, productivity and capital expenditure have fallen, to lesser/greater extent, across the world. 

At a point in the economic cycle when monetary policy would usually be rising, to hold off over heating economies, growth is not only slowing but reinforcing a long established slowing trend.  The recent US interest rates rise should not be considered as a counter cyclical rise but a “normalisation” of monetary policy.

A slowdown/well paced decline in growth should not in and of itself be a problem.  Capital depreciation is a natural way in which economies transition to lower growth/declining frame regimes.  There are two ways in which the current slowdown in growth is a much bigger risk to economic/financial system health:

1 – The first is that asset markets and asset focussed money supply growth have been juiced and expanded to stimulate growth on the assumption that weak growth was transitory/shock induced; these actions have raised the supply and value of assets (debt and equity) relative to economic growth; as growth slows, and the slower trend is established, expectations over future flows which give assets their value also decline.  In the absence of monetary policy aimed at asset values, asset values correct (equity) and/or default (bonds/loans).  This correction impacts present and future consumption as well as the financial system: bank deposits (broad money supply) are backed by assets; as assets devalue/default deposits/money supply are impaired further impacting economic stability. 

2- The distribution of national income has been increasingly skewed towards corporate profits and very small sections of the population.  Unequal distribution of income and capital impacts present and future consumption and capital expenditures associated with that profile.  These capital expenditures risk extending to core infrastructure/health/education spending.   Quality of life at so many levels risks being impacted.

US Capital expenditures


Helicopter money may be needed to support the eco system in the event of an asset price and financial system shock, as growth slows further or experiences a decline, amidst dysfunctional distribution of flows (income inequality). The time for Helicopter money may be drawing near, but it should not be considered a saviour of asset markets, rather the last gate along this particular road.  How it impacts the economic/financial system is likely to be complex and especially so given that the asset price unwind and accompanying demand shock of excess financial system debt could be fast acting.

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