Oddball Creature


Follow her down to a bridge by a fountain
Where rocking horse people eat marshmallow pies
Everyone smiles as you drift past the flowers
That grow so incredibly high

– The Beatles, “Lucy in the Sky with Diamonds”


lucy in the sky with diamonds_by_motorhead15-d7frlonLucy in the sky with diamonds…here you can see her in her latest incarnation.

Illustration by Motorhead15


BALTIMORE – We’re drifting in fog. Have been for years. And what’s this? A vague silhouette… the outline of something… coming into focus. Yes… it’s the strange Isle of Peculiarities and Impossibilities.

When it rains on this island, the water comes up from the ground. When the sun shines, you have to put on your galoshes. The plants growl… and the rocks weep.

We threatened to explore the Fed’s fabulous monetary policy today. So, let’s cast off… and row to the shore and see what we can find. When the Fed announced its QE program almost eight years ago, we didn’t know quite what to make of it. Animal? Vegetable? Mineral?

“Money printing,” we called it. “No, it’s not money printing at all,” said a number of voices, including some on the Bonner & Partners research team. It was an entirely new species, they said. They were right. It wasn’t “money.” And central banks weren’t “printing” it.

Instead, the Fed was simply replacing long-term debt (Treasurys and government-backed mortgage bonds) with short-term debt (“cash” reserve balances). The idea was that the extra demand would push up bond prices and push down yields. (Bond yields and prices move in opposite directions.)


1-TMS-2Actually, we have to disagree with this above interpretation. Here is a chart of the broad true US money supply TMS-2. It has increased by more than 120% since 2008. Someone sure “printed” all this money, and most of it was indeed created by the Fed (it creates both bank reserves and deposit money when it engages in “QE”). We have explained the process in detail here: “Can the Fed Print Money?” – click to enlarge.


Because the banks couldn’t spend their reserve balances. And they didn’t need them to make loans. Plus, it’s up to central banks what rate of interest they pay banks on those reserves. Then it got weirder.

Central banks began talking about… and later experimenting with… paying a negative rate of interest on those reserves. What was this oddball creature? Like the platypus or the pink fairy armadillo, we first thought it was a joke. It couldn’t exist. And yet, there it was.

Nobody knew what these strange beasts would do, either. Were they dangerous? Poisonous? Nobody had ever seen one before. But in the bars of lower Manhattan and the pubs of the City of London, heated arguments broke out as economists and traders tried to figure out this new ecosystem.

But time has brought the whole thing into sharper focus. And now, we see… What is really happening on this fantasy island? Apparently, we were right all along. It is money printing!


Warm Up the Choppers

Even establishment economists are starting to come around. Here’s the managing director of Capital Economics, Roger Bootle, writing in the London Telegraph:


Under QE, the central bank buys financial assets in the markets (usually government bonds) with money it issues itself, thereby increasing both sides of its balance sheet [asset and liability].

In practice, hardly any extra notes are printed. Rather, the extra money is created electronically. But since deposits at the central bank are interchangeable with notes, to describe this as “printing money” is acceptable shorthand.


helicopterCentral banker lunacy is evidently prone to going just as parabolic as global money supply charts have.

Illustration via pimco.com


The research department of French investment bank Natixis goes further with its analysis:


Some people call for putting into action a plan of “helicopter money”: the distribution of money [by the government… with no offsetting taxation or borrowing]. But in reality, quantitative easing already is helicopter money.


When a government gives out money – say, to the poor – explain Natixis analysts… and funds that spending with central bank purchases of government bonds… it is no different from just “printing money.”

The feds have gotten a credit, with no real debit. They have money to spend, but they don’t need to pay their debt. In fact, the way it works now is that the Fed returns the interest on the government’s bonds – as feeble as it is – to the Department of the Treasury.


Free Money!

It would be a bit like borrowing money to buy a car. Then, the lender sends your interest payments back to you… and keeps rolling over the debt, presumably forever. You would have a free car!

Which is exactly how economist Richard Duncan at Macro Watch describes it. Not only is the new money the feds get free… the central bank can also make past borrowing disappear.


2-BloombergA chart from Bloomberg showing consumer price “inflation” in developed economies (since the so-called “general price level” is a chimera, this chart actually makes no sense). Allegedly it is somehow “bad” for us when the purchasing power of money only declines slowly. Note the chart title, which is from Bloomberg. If the “helicopters” are fired up, an even more spectacular failure will be the result. Never mind though, we “have” to do it anyway! – click to enlarge.


Duncan says that when a central bank buys a U.S. government bond, it effectively cancels the debt. Interest payments are returned to the debtor… and the principal is never collected. QE is “debt cancellation,” says Duncan.

Let’s get this straight: You borrow… you spend… then your debt is canceled. It’s almost too good to be true, isn’t it? As a precaution, we’re getting back in our boat. This island gives us the creeps.


Charts by: St. Louid Federal Reserve Research, Bloomberg


Chart and image captions by PT


The above article originally appeared as “Helicopter Money Is Already Here” at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.




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3 Responses to “Lucy in the Sky with Diamonds”

  • wmbean:

    Are economists rational men? I think not. Let me get this straight. Money is a medium of transaction, that is, it is the third party in a barter system. You trade me apples for fish by use of a third party, a medium of transaction which has a store of value per unit. One dollar may be worth one apple and it may be worth half a fish. This also works for services. I want an apple to eat and you need your apples picked, but I don’t want to be paid in apples. Thus the medium of exchange with its store of value says my service is worth so many dollars. So far, so good.

    Then along comes the Treasury and the FED who trade government bonds for printed money (so it’s credit, spends the same way). The bond is an asset, future promise to pay with a premium called interest. In exchange the Treasury gets a wad of hundred dollar bills to spend according to the dictates of Congress. After all, they are the ones who authorized all government spending and fund the accounts by way of the treasury. Not enough tax receipts, then sell government bonds for the cash or electronic bank credits.

    But that bond is both an asset and a debt. That is, it is a promise to pay at some future time the full amount on the face of the bond with additional payments for the privilege of borrowing the money. And until it is redeemed, as a debt it never goes away. If defaulted, the creditor assumes the debt, which is a loss of capital. Now correct me if I have any of this wrong.

    But now we have economists telling us that when the FED buys government bonds at negative interest rates and then commits to a perpetual rolling over at the maturity every bond, that the debt has been effectively extinguished? The debt is still there regardless of whether it’s a one year bond or a ten thousand year bond. If one simply burned the note or piece of paper the bond is written on one effectively cancels the debt but one still suffers a loss of capital even if one can print capital with impunity.

    Money, because it is a medium of transaction and a store of unit value creates a balance sheet. Sometimes we call this the confidence level of a currency whether it be government of private script. But it is still a balance that can be measured. In 1919 Austria government bonds could not be sold for love or money and yet they were still claims on the future earnings, if any, of the government. Until the bonds were repudiated they still had future worth. Confidence was the assumption that the economy would return to normal in the future and the bonds would be redeemed. But it was the currency or money of Austria that suffered devaluation with every new printing. It was out of balance since there was very little government revenue available for restoring its full prewar value. There were no accounts receivable to pay the accounts payable. There were no government assets that could provide liquidity for accounts payable and thus the currency had little but promised future value. Only a few believed in the future promised value.

    So why is it different this time? I would love to hear a few economists explain this point.

  • All-Your-Gold-Are-Mine:

    Nailed it Bill Bonner! Meanwhile, morons think the US has a monopoly on this.

  • No6:

    Yep, the indispensable nation, showing the way forward.

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