30/01/2016

Helicopter Money Dropping - by Jeff Fitchett

The world economy is trapped in a debt bubble that is in the process of popping.  Governments are running budget deficits.  Corporations are downsizing and laying off hundreds of thousands of employees in an effort to remain viable.  Citizens are struggling with their personal debt.  The biggest problem with a debt bubble is that each year the amount of debt must increase by an amount that covers off the previous years debt plus interest. When debt levels hit a point where debt growth decreases, income must increase at a rate that will cover off the debt payments.  Income comes in the form of taxes for governments, revenue for corporations and actual employment income for individuals.  

Income tax revenue is not covering the cost of government budgets because consumer income is dropping in most countries and not keeping up with growing debt levels.  Corporations are experiencing the negative feedback loop of a depressed consumer.  Central banks have stepped in and lowered interest rates and pumped the system with excessive amounts of fiat currency.  In some cases, the interest rates on government debt is negative.

Sadly, politicians and central bankers have two choices over the near term to medium term: 

1. Mass debt defaults that destroy a nations currency and society.  
2. Print money and monetize debt that destroy a nations currency and society.  

Greece is a recent example of what happens when austerity policies are initiated and a government defaults on their debt.  The standard of living for the population decreases rapidly and social upheaval follows.  Unemployment goes up immensely and entitlement benefits are cut. Public assets such as ports, public transportation and utilities are sold off to corporations for pennies on the dollar. That said, Greece's debt was restructured and is continuing to grow again.

Monetizing debt usually results in hyperinflation.  Today, Venezuela is a perfect case study for people to learn about because they are experiencing hyperinflation.  The projected inflation rate in Venezuela for 2016 is 720%.  Monetizing debt initially allows for governments to continue making payments on their debt and paying entitlements such as government pensions and healthcare.  Confidence is lost in the currency and eventually the currency becomes worthless.  I believe governments and central banks will resort to money printing policies because austerity and direct defaults are not popular with the public. Printing money is a hidden tax on the population as inflation increases.  Listen to former Federal Reserve Chairman Alan Greenspan on this subject: We can always print money.

Public backlash from taxpayer sponsored bailouts of too big to fail banks and multinational corporations is fuelling alternative "stimulus" plans that give the appearance of helping the 'average Joe'.  For instance, a new tactic is giving money directly to the people.  It is also known as 'helicopter money dropping'. Switzerland is holding a referendum in June about whether or not to create a living wage for its citizens. The vote is about giving each adult in Switzerland $2500 per month and each child $750 per month. Finland is considering giving each citizen $900 per month.  The idea is that this will allow people to spend money on consumer goods and services and in turn stimulate the economy.  

At the end of the day, 'helicopter money dropping' is like moving around deck chairs on a sinking ship.  It won't solve anything over the long run. It involves printing money and going further into debt.  A successful economic model needs to produce more than it consumes.  People need to save more than they spend. This is how wealth is created.  

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