'Get To Da Choppa!': Helicopter Money Cometh

| About: SPDR S&P (SPY)


Here we go folks. The rotors are spinning.

Japan is about to embark on a helicopter tour to fight deflation.

Schwarzenegger would be proud.

Let's get one thing straight at the outset. There was only one chart that mattered on Monday. This one:

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That folks, drove the S&P (NYSEARCA:SPY) to all-time highs, which is what you get when you mix a little of this:

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(Chart: BofAML)

With some of this:

And then top it off with a dash of this:

As you might have heard, Japanese prime minister Shinzo Abe's ruling coalition scored a resounding victory in the Upper House in what's being billed as a (completely inexplicable) round of applause for Abenomics.

Because I know you don't care about Japanese politics, I'll just tell you what you need to know as a US equities investor. Actually, SocGen will tell you:

With PM Abe's economic policies being approved by voters, the LDP/government campaign has pledged to expand the economy through further implementation of Abenomics policies. The first step will likely be to announce a supplementary budget focused on economic stimulus of at least JPY10tn (2% of GDP) at the extraordinary session of the Diet in the autumn.

Let me translate that. Here's the equation: Abe political win + intractable disinflation impulse = fiscal stimulus = helicopter money.

That's right, they're probably going to "go there" and become the first Krugman paradise to "get to the chopper."

"Fueling" the helicopter rumors was a Bernanke sighting. Here's Reuters:

Government sources told Reuters on Friday that Bernanke, who steered the United States through its worst financial crisis in modern times, would meet with Bank of Japan Governor Haruhiko Kuroda and Prime Minister Shinzo Abe this week.

Some investors have speculated that Bank of Japan Governor Haruhiko Kuroda might decide to provide "helicopter money" -- a term coined by economist Milton Friedman and cited by Bernanke, before he became Fed chairman, as a way to finance government budgets and fight deflation.

"There was some news that Bernanke was visiting the BOJ, which was more than enough to drive a big rally in risk," said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York.

Okay, so you need to understand something about "helicopter money." It's already here. QE is deficit financing. Just because there's a bank intermediary doesn't change that.

Think about it. You're a government. You issued a bond. A bank bought it. You bought it from the bank. So ultimately, you printed a paper liability and then you bought it with a paper liability that you also print. It's absurd. Here's Deutsche Bank:

We view 'helicopter money' as monetary financing of fiscal spending. This has been implemented in many developed countries in the form of quantitative easing (QE) following the Global Financial Crisis (GFC). The Bank of Japan has been financing almost all the central government's general account spending (excluding debt service costs) by expanding the monetary base over the past three years.

So what's different now? Why did the yen careen lower overnight? Why is this helicopter money different from that helicopter money? Well, Deutsche will be happy to explain the two camps operating under the "radical" helicopter money umbrella:

One segment of radical helicopter money (RHM) proponents argues that central banks should purchase zero interest rate perpetual government bonds.

Of course, as Deutsche rightly points out, purchasing bonds with negative yields while continually extending the average duration of your portfolio basically means you're already doing this.

(Chart: Deutsche Bank)

The more "radical" of the "radicals" advocate canceling government debt altogether. Cue radically awesome radical goat clip:

So basically this can't possibly work for any number of reasons. Here are a few, spliced together from Deutsche's lengthy treatment of the subject (emphasis mine):

Where the BoJ's current QE differs from RHM is that it assumes the future redemption of JGBs (which is natural). Under RHM, the central bank has to promise not to ever implement its exit strategy. Effectively, an RHM strategy forces the central bank to pretend that it responsibly adopts an irresponsible policy of no exit forever and convince the financial market and the private sector that it is a credible policy. However, continuing RHM eventually accompanies a rise in inflation in excess of the central bank's target, which leads to monetary tightening. At this point, canceling of government debt would be impossible to pursue.

Debt has two aspects: for a borrower it is debt but for the owner of the debt it is an asset. It is obvious that writing down debt triggers a reduction in the value of the assets for the owner of the debt. This acts as a restraint on the economy through the negative wealth effect.

Put simply, the central bank's balance sheet consists of government securities in its assets and bank reserves in its liabilities. If government bonds become worthless, the central bank would become insolvent.

Under BIS regulations governing banks, each country's financial authority is entitled to exercise discretion in the calculation of the risk weight for local currency- denominated government debt. Government bonds rated single-A have a risk weighting of 20% but JGBs are weighted at zero as an exception by the financial regulator. Were JGBs to become worthless, this exception would almost certainly be invalidated, risk assets in the bank sector would increase, and banks would need more capital.

All great points. But the most important is the first. This: "...continuing RHM eventually accompanies a rise in inflation in excess of the central bank's target."

See the thing is, the electorate is dumb. On top of that, they don't generally care. That goes double in America.

But at a certain point, absurdity is absurdity and it's readily apparent even to the simplest of simpletons. "Radical" helicopter money risks alerting "Joe the plumber" to the absurdity of what's going on. Once they "get it," it's Weimar Republic time.

In the interim, it's risk on!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.