Will Japan Be The First To Try 'Helicopter Money'?

| About: WisdomTree Japan (DXJ)

By Tim Maverick

For those wondering why the S&P 500 Index and Dow Industrial Average have suddenly touched new highs, there is a simple explanation - helicopter money.

Actual implementation, however, will not be quite as easy.

Helicopter money has been a hot topic ever since the former Federal Reserve chairman Ben Bernanke, aka "Helicopter Ben," paid a visit to Japan.

The current version of helicopter money does not include giving money to the populace, even though there have been rumors of this. Instead, as the idea stands now, it involves a central bank directly financing government spending.

After all, a government knows how to spend the money much better than individuals do. Right? (Please note the sarcasm.)

And who better to offer advice than a pilot adept at flying helicopters full of money - Helicopter Ben, himself?

In a blog post written in April, Bernanke explained that the monetization of debt by a central bank could be the "best available alternative" in "extreme circumstances."

These circumstance include weak demand, a central bank that is out of ammunition, and a government that doesn't want to rely on borrowings for spending.

Bernanke-san in Japan

This "extreme" seems to describe Japan in its current financial state.

The Japanese economy has been moribund and stuck in deflation for many, many years.

Inflation expectations are at their lowest point since late 2012. And the yen - thanks largely to the dovish Yellen Fed - is up 15% in 2016, which is further sapping the little momentum the Japanese economy had.

Thus, the Japanese government, under Prime Minister Shinzo Abe, may be ready to take a leap of faith into monetary unknown known as helicopter money.

The first clue that something big could be underway was when Bernanke publicly stated the Bank of Japan still has a range of monetary policy measures at its disposal.

Add to that the fact that Abe, after a big election win for his party, announced a new round of fiscal stimulus spending of at least $100 billion.

In effect, the markets were adding 1 + 1 and somehow coming up with a sum of 100.

A New Kind of Bond

What exactly did Bernanke advise the Japanese to do?

Bloomberg reports that he floated the idea of the Japanese government issuing non-marketable, perpetual zero coupon bonds with no maturity date.

The Bank of Japan would then wave their magic central bank wand, creating money out of thin air, and then buy up those bonds with that brand new yen.

This is the ultimate free lunch for governments - to pile up a bunch of debt that will never have to be repaid. Instead, the central bank will simply monetize it.

In other words, the debt will be forgiven.

What's Next for Japan?

Will Japan actually let these monetary helicopters take flight? Or are they just blowing smoke?

At this moment, it is impossible to know whether a cautious Japan will actually listen to Bernanke.

In fact, Article 5 of the Fiscal Law specifically prohibits the Bank of Japan from directly financing the deficit - so there is already a major roadblock standing in opposition to a future of helicopter money.

It will be advisable to pay very close attention to the upcoming Bank of Japan meetings - on July 28 and 29, and then again in September. Perhaps the Japanese will hold off, since talk of helicopter money has already weakened the yen, which is what Japan wants and needs to implement change in other ways.

Hopefully they wise up, since it actually seems that helicopter money is the last stage of monetary experimentation - and, is a dangerous path to follow.

First, there would be a euphoria-like state - "Free money! Let's party!"

But then reality would set in. Central bank credibility would then come into question, as would the currency involved. People would then begin to panic that authorities have lost control.

If the market ever hits that stage, it's time to delve into the precious metals sector like it's, well, pure gold.

Helicopter money, despite the respite it could potentially offer, is a slippery slope, and Ben Bernanke is playing a dangerous game by pushing Japan towards that cliff.

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