More blatant promises than hints, in truth...
IF YOU'RE bearish on stocks in general, then last week's Reserve Bank interest rate cut, with the promise of more to come, should give you pause for thought, writes Greg Canavan at The Daily Reckoning Australia.
Because the one thing that could keep stocks elevated (absent some miraculous revival in global economic fortunes) is the continued war on cash.
By war on cash, I don't mean attempts to eradicate it from the financial system. I'm referring to attempts to reduce its value by all means possible.
Let me show you what I mean...
Two disturbing articles appeared in globally-significant business publications recently, which give you a good indication of the direction the world is heading.
First up: 'The hurdles to 'helicopter money' are shrinking', an opinion piece by Stephanie Flanders in the Financial Times. You won't be surprised to learn that Flanders is European Chief Market Strategist for J.P.Morgan Asset Management.
Never forget, economic policy is policy for the elites, designed by the elites. That one of the world's biggest asset managers is calling for 'helicopter money' tells you all you need to know.
Flanders starts by telling us that the term 'helicopter money' was first coined by Milton Freidman in 1948. (Incidentally, at the same time, George Orwell was writing 1984. Perhaps he was partially inspired by Freidman's insanity?)
She then goes on to say:
"It is an evocative concept, but is it even possible and could it work? The answer to both questions is yes. Central bank-financed fiscal stimulus would be the logical endpoint of the unconventional policies we have seen from central banks since 2008."
There you have it...before the article even gets going. The logical endpoint for continually failed monetary theory is one gargantuan role of the dice to finance endless government spending with central bank money printing!
Or, perhaps you would prefer to hear it in more palatable technical terms:
'To pay for that spending, commercial banks would be credited with an equivalent amount in new central bank reserves.
"At the same time, the government would credit the central bank with a perpetual non-interest bearing bond, functionally equivalent to cash.
"That accounting item answers one common objection to the policy – that it would leave a big hole in the central bank's balance sheet."
Whichever way you cut it, the advocated policy is for governments to deposit printed 'money' into peoples' bank accounts. But once you start that snowball, it's impossible to stop. There will always be the need for more.
But make no mistake, it is coming. It's a form of doubling down on Quantitative Easing. All we need is another downturn to set it off. Here's the conclusion from J.P.Morgan's mouthpiece:
"If another downturn threatens while policy rates are still close to zero and balance sheets are still enlarged, it is a reasonable assumption that at least one central bank abandons the pretence and monetary financing will complete its move from the unthinkable to the merely 'unconventional'."
The rumblings of such thinking give you some idea of what commodities markets might be starting to react to. I mentioned yesterday that commodities look like they are bottoming, but the reason for this wasn't yet clear.
Well, bringing 'helicopter money' into the monetary lexicon is as good a reason as any.
The other disturbing article I read on the same theme comes from Bloomberg – 'How to pull the world economy out of its rut'. The hero of the piece is Lawrence Summers, who missed out on the Federal Reserve head role in 2013 to Janet Yellen.
But, instead of lying down after that rebuke, Summers has upped the ante. As Bloomberg tells it:
"Focusing on monetary policy alone, he says, they're doomed to fall short of reviving growth. They need to reach out to the governments they work for, he argues, and insist on strong fiscal stimulus in the form of infrastructure spending and the like."
The crux of Summers' argument is that zero nominal interest rates won't revive economic growth because the presence of deflation means REAL interest rates are too high.
His argument for why that might be is a tired one. He believes there is a lack of demand, and too much supply. It's Ben Bernanke's 'savings glut' theory, first espoused back in 2003 from memory.
He doesn't stop to think that there is not enough demand because we've borrowed as much as we can from the future by getting into massive debt. The very definition of debt is demand brought forward. And we wonder why there is a demand problem...
If there is too much saving in the world, the easy way to wipe that out is to raise interest rates. That might sound strange but hear me out...
A decade of easy money has ensured that just about everything has been 'monetised'. Houses, car loans, commercial buildings, pipelines, power plants, airports, and just about anything else you can think of.
This monetisation, or securitisation, of assets is someone's savings. Put another way, one person's debt is another's savings. We've got excess savings because we've got excess debt!
It follows then that, if you want to get rid of some of it, you have to raise interest rates.
Of course, that will never happen. It's always demand that's the problem. There's just never enough.
Summers hasn't blatantly called for central banks to finance more government spending. But that's the direction the world is headed. By this time next year, you might see it in action.