The bond market is telling us that Milton Friedman's 1969 thought experiment -- freshly-created money appearing in people's bank accounts, known as helicopter money -- may be closer than we think.
Almost $10 trillion of the world's bonds now yields less than zero, of which more than $6 trillion is Japanese debt. According to the Sankei newspaper on Tuesday, Japanese Prime Minister Shinzo Abe was recently told by adviser Etsuro Honda that "now is the time to introduce helicopter money," while special adviser Koichi Hamada said it should be restricted to a one-time event.
"Wo ist der Hubschrauber?" the economist Russell Napier asked recently, alluding to whether the Frankfurt-based European Central Bank would soon resort to helicopter money. He might have asked instead "herikoputaa wa doko?" because the question "where is the helicopter?" is getting more attention in Tokyo.
Both advisers later backtracked somewhat: Hamada told Bloomberg News that it would be a "very risky gamble," while Honda says he favors expanding bond purchases rather than driving interest rates deeper into negative territory. Chief Cabinet Secretary Yoshihide Suga told reporters that the government isn't considering helicopter money. But he would say that, wouldn't he?
The story came on a day when Japan halved its growth forecast for this year and slashed its inflation estimate to 0.4 percent from an earlier projection of 1.2 percent. Quantitative easing is failing to resuscitate the Japanese economy. The idea no longer sounds as far-fetched as it did even a month ago when Bank of Japan Governor Haruhiko Kuroda suggested he wasn't in favor of such action.
Former Federal Reserve Chairman Ben Bernanke, who popularized the idea of helicopter money in a 2002 speech, met with Japanese officials including the prime minister earlier this week. Government adviser Honda, who arranged the talks, said he thought "it would be beneficial if the prime minister understands that there is a global leading scholar clearly advocating helicopter money."
It's not just Japan that's ailing. The risk of deflation in many developed economies threatens to hobble global growth. "World trade hasn't grown at all in 15 months, which is rare outside of global recessions," says a report published this week by the Centre for Economic Policy Research. "The total value of capital goods trade fell in the first half of 2015 and then plateaued. Same for consumer goods."
Expectations for inflation are reflected in borrowing costs all around the world. For the first time ever, the German government was able to borrow fresh money for a decade on Tuesday at a negative yield and with an interest rate of zero. Switzerland was able to do the same for money it won't have to repay until 2058, while Deutsche Bahn, the German state railroad, this week became the first non-financial company to issue new bonds with negative yields. In the U.S., 10- and 30-year Treasury yields set record lows this month.
In Europe last month, 18 members of the European Parliament wrote to European Central Bank President Mario Draghi calling for an examination of policies beyond QE:
We urge the ECB to carry out a full and in-depth analysis of alternative policies to quantitative easing via financial markets. Those alternatives would include the introduction of a citizens’ dividend, using ‘helicopter money,’ and the buying of bonds from the European Investment Bank, as possible solutions to enhance economic development through direct spending into the real economy.
A Google search for "helicopter money" turns up about 16 million results, showing how a once obscure economic theory has entered the popular policy lexicon. As this chart shows, occurrences of the term in the stories that run on the Bloomberg terminal surged in April and are back on the rise this week:
Psychology tells us that the five stages of grief are denial, anger, bargaining, depression, and acceptance. For those mourning the death of growth and inflation, acceptance of the current order increasingly looks like welcoming money from the sky.
By Mark GilbertFrom Bloomberg View