Daily Comment (March 22, 2016)

by Bill O’Grady and Kaisa Stucke

[Posted: 9:30 AM EDT] The big overnight news was a series of apparent terrorist bombings in Belgium.  At the time of this writing, 34 are confirmed dead after two bombing attacks, one at the Brussels airport and the other at a metro station near EU headquarters.  There have been reports of evacuations of a park near the royal palace and the palace itself.  At this time, it isn’t clear if more attacks are in the offing.  It is presumed that these were conducted by Islamic extremists; according to Belgian authorities, one attack was carried out by a suicide bomber, which is consistent with the operational tactics of Islamic terrorists.

Financial markets are reacting in a manner consistent with other such events.  The dollar, yen, Treasuries and gold are higher, while equities in Europe and the U.S. are lower.  Usually, such attacks don’t have an extended impact on the markets unless they are followed by additional events in short order.  It is highly probable that these attacks are in retaliation for the recent arrest of Salah Abdeslam, who is thought to be a key figure in the Paris terrorist attacks.

In other news, as we show below, the flash PMI data is out.  The European data was stronger than expected, led by robust German growth, while Japan was weaker than forecast.  The U.S. data is out later today.

Both Bloomberg and the WSJ are reporting comments about introducing “helicopter money.”  It is becoming apparent that monetary policy is reaching the point of diminishing returns.  With interest rates already low, QE is now at the point where central banks are simply accumulating assets.  The recent decision by the ECB to buy corporate debt dovetails with the BOJ’s purchases of equities.  At some point, it will become apparent that these measures merely prop up the financial markets but do little to actually boost economic activity.  Globally, investment remains depressed and the wealth effect hasn’t helped boost consumption.  For the most part, monetary policy works through the financial system but it does have the problem of “pushing on a string.”  In other words, just because one can create conditions that foster borrowing doesn’t mean that borrowing will actually occur.  Creditors may be spooked by the inability of debtors to service debt even at low rates, and debtors may not want to borrow.  Going to NIRP is probably the Almighty’s way of suggesting that monetary policy is exhausted; after all, the distortions caused by negative interest rates may far exceed the benefits.

Helicopter money means that the central bank directly funnels money to consumers, either by direct injections of liquidity to households (thus the metaphor of “helicopter”) or by direct monetization of fiscal spending.  We have seen others talk about this as well; Jeremy Corbyn has proposed “QE for people” by directing funds to the public rather than through the financial system.  If there is a dearth of public investment, monetization of fiscal spending on roads, bridges, etc. is probably a better way to inject funds into the economy.  In a developed economy, the direct support of household spending might work better.  It should be noted that such activity does occasionally occur during periods of war; during WWII, the Fed capped interest rates despite massive government borrowing, which was a form of debt monetization.

Although helicopter money has the tone of something from Marx, it was actually proposed by one of the titans of conservative economics, Milton Friedman.  Would it be inflationary?  Eventually, although in a world awash in excess capacity it might take longer to create inflation than one would think.  If trade remained open, one would expect to see a flood of imports and a weaker currency result.  Although we are not at the point where such policy moves are imminent, we would not be surprised to see this policy deployed if rates are very low going into the next recession.

Finally, former President Bill Clinton got a bit off message yesterday with this quote:

If you believe we can all rise together, if you believe we’ve finally come to the point where we can put the awful legacy of the last eight years behind us and the seven years before that when we were practicing trickle-down economics…then you should vote for her.

This comment flies in the face of his wife’s campaign, who has been running on a platform similar to that of a sitting vice president, namely, honoring the legacy of the last president.  After all, George H.W. Bush didn’t run as a change candidate when he succeeded President Reagan.  Although the former president tried to walk back the quote, suggesting he was talking about obstructionism, it is hard to argue that Obama faced much obstruction in the first two years of his term when his party controlled both houses of Congress.  Either Mr. Clinton “has lost something off his fast ball” or he may have revealed his true feelings.

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