“Inflate or die,” the great Richard Russell used to say. He meant that central banks committed to “fighting deflation” and confronted with massive debts in the economy had but one choice: crank up the press.
Fund manager Bill Gross agrees
But he’s arguing for the airborne printing press (“helicopter money”). In a recent note to clients of his $1.3 billion Janus Global Unconstrained Bond Fund, Gross makes the argument for what the central banks have to do (emphasis added is mine):
Drop the money from helicopters. There is a rude end to flying helicopters, but the alternative is an immediate visit to austerity rehab and an extended recession. I suspect politicians and central bankers will choose to fly, instead of die… Our new age economy — especially that of developed nations with aging demographics — is gradually putting more and more people out of work… if more and more workers are going to be displaced by robots, then they will need money to live on, will they not? And if that strikes you as a form of socialism, I would suggest we get used to it. Even Donald Trump claims he won’t leave anyone out on the street… Interest rates will stay low for longer, asset prices will continue to be artificially high… At some point, monetary policy will create inflation and markets will be at risk. Not yet, but be careful in the interim. Be content with low single digit returns.
Ponzi scheme
This is the “endgame” theme John Stepek suggested for this year’s conference on 3 October. The central bank Ponzi scheme of passing the buck either ends in disaster or success. Which will it be? In a contest between market forces and central bankers, who will win?
And more importantly, how can YOU not lose or get caught in the cross fire?
Keep in mind that John Maynard Keynes was right about one thing: in the long run we’re all dead. The whole point of “perpetual debt” – extending the maturity of long-term debt obligations even longer – is that you never have to repay borrowed money. If you can print cash to pay interest, or print cash to give people a basic income, what’s the problem?
The problem is philosophical, theoretical and material. Materially, you can’t get something for nothing. Even in a fractional reserve banking system, something can’t come from nothing.
Somebody somewhere has to produce something of value for the process of wealth and credit creation to begin. Maybe that something is just building a printing press. But all wealth begins with an idea that becomes a thing that you can trade.
Change in the public mood
Theoretically, the capacity of central banks to print money or buy assets is infinite. In reality, the limit is political. Central bank independence will be challenged when politicians sense the public mood has turned. The public mood has turned.
People sense something inherently unfair about those with access to cheap credit benefitting the most from rising asset prices. But that anger isn’t inarticulate yet. It’s finding its voice with the likes of Trump, Corbyn, Sanders, and Brexit.
Philosophically… well philosophically you and I can’t do anything about the big stuff, can we? We can just do the best for ourselves and our family. The philosophical problem is what to do when you know something can’t last forever, but you don’t know when it’s going to end. I suspect that will be one of the key subjects for the conference.
Category: Central Banks