Helicopter money - Allianz Global Investors
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Helicopter money - Allianz Global Investors
Helicopter money: The next step in financial repression? Financial Repression Might it be more than just “a very interesting concept”? There is a growing public discussion surrounding the “monetisation of government debt” (or “helicopter money”) which, to put it in a less academic way, means central banks printing money with the direct purpose of financing public sector budgets. It was none other than the President of the European Central Bank (“ECB”), Mario Draghi, who has injected life to this debate. Hans-Jörg Naumer Global Head of Capital Markets & Thematic Research Allianz Global Investors From QE 1, to QE 2, to QE 3, … At the beginning of 2016, the global monetary At the same time, the Bank of Japan (BoJ) continues policy situation was still in expansionary mode; undeterred. In the meantime, it has not only even the interest rate move by the US Fed in brought in a negative deposit rate but is expanding December 2015 should not detract from this fact. its balance sheet by 80 trillion Yen every month. Although the Fed raised key interest rates by 25 Currently, its balance sheet is equal to 70 % of basis points for the first time since 2008 and had Japanese gross domestic product. Meanwhile, terminated its quantitative easing programme the European Central Bank has cranked up its as early as autumn 2014, it is still a long way from expansionary monetary policy a number of times normalising monetary policy. Measured against and it can now be considered a “QE 3” programme. the “Taylor Rule”, its current base rate, based on its historical response function, should be above 2 % Accordingly, this is reflected in the yield and then raised to 4 % by 2017. The Fed is far off environment. Large parts of euro area countries’ doing this. True, the purchasing programme is not yield curves and those of several neighbouring going to be continued but the expansion of the countries are displaying negative nominal yields. balance sheet is also not going to be reversed – on In the case of Switzerland, this applies to bonds up the contrary. Maturing government bonds will be to maturities of 15 years. Globally, a volume of six replaced by new purchases. trillion US Dollars in government bonds are trading at negative yields. Helicopter Money Figure 1: Government bond yields on the short end to mid-range of the curve are hovering in negative territory, not only in Europe Generic government bond rates, in %* 3M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 30Y Germany –0.55 –0.45 –0.49 –0.47 –0.39 –0.30 –0.25 –0.16 –0.05 0.10 0.23 0.42 0.67 0.93 France –0.42 –0.43 1.00 1.15 Netherlands –0.47 Belgium –0.46 Austria –0.43 –0.35 –0.27 –0.17 –0.03 0.11 0.24 0.40 0.57 –0.48 –0.43 –0.39 –0.31 –0.09 0.04 0.16 0.31 0.44 –0.44 –0.44 –0.39 –0.32 –0.24 –0.13 0.01 0.28 0.47 0.61 1.05 –0.43 –0.43 –0.35 –0.32 –0.27 –0.07 0.00 0.12 0.28 0.43 0.57 1.47 1.05 1.15 1.60 1.34 Finland –0.44 –0.40 –0.33 –0.21 –0.14 0.01 0.12 0.26 0.36 0.54 0.91 Switzerland** –0.90 –0.94 –0.91 –0.85 –0.78 –0.66 –0.58 –0.46 –0.36 –0.30 –0.04 0.09 0.26 2.02 2.20 2.35 0.07 0.34 0.46 Sweden** –0.61 –0.50 –0.64 Denmark** –0.26 –0.49 –0.31 –0.15 0.47 0.43 –0.50 0.67 UK US Japan –0.43 0.30 0.61 0.89 1.07 –0.11 –0.23 –0.23 –0.23 –0.12 0.17 –0.01 0.31 0.81 0.90 1.10 1.27 –0.23 –0.23 –0.23 –0.22 1.42 1.12 0.54 0.50 1.40 1.50 1.74 1.05 1.94 –0.20 –0.16 –0.11 2.72 * Generic government rates monitor yield changes for government benchmark bonds. ** Non-EMU countries Past performance is not a reliable indicator of future results. Sources: Bloomberg, AllianzGI Global Capital Markets & Thematic Research. Data as of 23 March 2016. … to helicopter money? Read more on monetary policy in our latest white paper “Monetary policy divergence – a new transitory regime for global central banks” The question is, what is the next step from there, from being not only a lender but also a spender of especially if loose monetary policy does not deliver last resort: what it has promised? The official interpretation is that the ECB wants to avoid a slide into deflation and to bring inflation towards its target figure of 2 %. • Acting as lender of last resort is one of the constitutive tasks of a central bank. In the context of financing the public sector, however, For further information please refer to “Low yields and shrinking mountains of debt”. 1 2 3 4 ario Draghi in M “Introductory statement to the press conference (with Q&A)”, European Central Bank of 10 March 2016 T urner, Adair; “Between Debt and the Devil – Money, Credit and Fixing Global Finance”; 2015 uiter, Willem; “The Simple B Analytics of Helicopter Money: Why It Works – Always”, 2014 n expression that was A coined by Milton Friedman and whose usage has been recently revived by the former Chairman of the Federal Reserve, Ben Bernanke. The debate which is gaining more and more this expression would take on a whole new traction must be seen against a backdrop of meaning. It would no longer just be a case of limited fiscal room for manoeuvre: it is about the monetary authority becoming a lender of the monetisation of government debt, i. e. the last resort during liquidity crises, but instead financing of existing public sector debts, such as of its being ultimately responsible for wholly ongoing budget deficits, using monetary policy. or partially financing government debts. It was none other than the President of the ECB The technical expression for this is “debt himself, Mario Draghi, who called helicopter money “a very interesting concept”1 during the monetisation”. • It would become the spender of last resort press conference following a meeting of the if it was ultimately responsible for financing Governing Council in March 2016. on-going public sector budget deficits, for example with the aim of thereby enabling the The main champion of this school of thought is presumably Adair Turner2; going in the same direction.3 but Willem Buiter is The International state to launch economic stimuli. Since, in this case, fiscal deficits would be financed by directly printing money, it is also called “helicopter Monetary Fund, at its 16th Jacques Polak Annual money”4, “overt money finance” or even Research Conference in November 2015, devoted “monetary finance”. a lot of attention to this issue, with the advocates dominating the debate. Supporters of this radical form of monetary policy are in favour of the central banks, under the primacy of fiscal policy, going Helicopter Money A technical view of helicopter money and the monetisation of debt 3. Government bonds would be cancelled from the balance sheets which would effectively be a selective haircut on its own assets. But it What are the specifics of these terms and what would not be a general haircut, which would would their implementation look like? have consequences for other bondholders in addition to the central bank. While the aim of helicopter money is to be used to finance economic stimulus packages, monetisation In terms of the technicalities of accounting targets existing government debt. Monetisation methods, the question arises at to whether this could be carried out in a variety of forms: form of fiscally-induced monetary policy is at all temporarily, e. g. to facilitate debt refinancing for possible and, if it is, what would it look like? limited periods with cheaper interest rates (which Don’t miss our “QE Monitor” corresponds to quantitative easing or QE) or In the case of monetisation, in which there would permanently. be no “exit” in the form of a sale of purchased securities and the portfolio of government However, even in the case of permanent bonds held would be unchanged, the central monetisation, it would again be necessary to bank’s balance sheet in relation to GDP would distinguish between the ways in which it is remain temporarily inflated. However, after some conducted. There are three conceivable methods, time it would then normalise again in line with which must be viewed in terms of the various nominal economic growth. The central bank impacts they would have on the balance sheet of would have achieved a situation in which it would the central banks: have reduced market yields and thus helped the government to finance itself. 1. 2. In the scope of quantitative easing, government bonds are purchased by the In the case of the second of the options described central bank and prolonged by continued above, if government bonds are turned into purchases of newly issued bonds. “perpetuals” (bonds with unlimited maturities), Consequently, the coupons are paid directly if necessary with a concurrent reduction in or by the central bank and not out of the suspension of coupon payments on the part of government’s budget. This is a development the government, it should result in a write-down that can already be observed at the Bank of in accounting terms, which would lead to losses Japan (BoJ). or even to negative equity. Since a central bank is Government bonds would remain pro not a normal commercial bank, though, it does not forma on the asset side of the central banks’ have to value its assets at market prices. The assets, balance sheets. However, maturities and even if their value has drastically changed, could coupons would be changed in such a way remain unchanged in the balance sheet. that they would hardly represent a liability for 5 dair Turner “Rethinking The A Monetization Taboo”, March 2013 on “project syndicate” countries any longer. For example, maturities The final possibility (option 3) is for the could be significantly extended, as far as government bonds to be wound up. If a central converting them into so-called “perpetuals”, bank holds government debt of its own country, and coupons could be reduced or completely according to Turner5 the state effectively has eliminated. This would have the same effect receivables from itself. Hence, the Bank for as a haircut, since the net present value of the International Settlements (BIS) deems the balance bonds would fall to zero but would, at least if sheet of central banks to be a single entity together the generally accepted accounting principles with the balance sheet of the state. From this point are not applied, protect the central banks of view, government bonds held by the central from having to make write-downs on their bank would be nothing more than assets that are portfolios. accounted for on the fiscal side as liabilities. Helicopter Money If both are netted there would be a reduction in the balance sheet total6. From an accounting point of view, this means there would be no barrier to permanent monetisation. If necessary, seigniorage would be used over the Seen in this way, it is consequently irrelevant as to course of time to build up assets and could not be whether the government services its own debt, transferred to the finance minister – which would e. g. whether it pays coupons that fall due to the be of less significance in light of the robbing Peter central bank or not. Coupon payments accrue to pay Paul aspect. In short: a central bank “cannot as seigniorage at the central bank that are then go bankrupt in the sense that a private firm can.”11 transferred to the tax authorities, after the latter has already paid them to the central bank in the Understand. Act. first place. This is a case of robbing Peter to pay Paul and is a zero-sum game. A devil’s advocate of monetary policy may wonder what can be expected to happen in the United However, from the standpoint of central banks States, Japan and the Euro area. The fact is that the themselves, they would have to recognise an Federal Reserve holds approximately 15 % of US impairment which, depending on how high it is, gross public debt on its balance sheet, but replaces could also lead to negative equity. From a historical maturing government bonds with new ones and perspective, though, this would not be a novelty. In thus keeps the volume stable. the past, various central banks had negative equity 6 7 8 9 f.: BIS Working Papers No C 161; “The Monetisation of Japan’s Government Debt”; September 2004 f. Dalton, Joh; Dziobek, C Claudia; “Central Bank Losses and Experiences in Selected Countries”; IMF Working Paper 05 / 72; April 2005 f. Frankfurter Allgemeine C Zeitung of 2 May 2015; “Schweizer Notenbank macht Milliardenverlust”; No 101 p29 f. Stella, Peter & Lönnberg, C Ake; “Issues in Central Bank Finance and Independence”; IMF Working Paper 08 / 37; 2008 and: Bernanke, Ben; “Some Thoughts on Monetary Policy in Japan”; The Federal Reserve Board; May 2003 10 11 f. Bernanke, Ben; “Some C Thoughts on Monetary Policy in Japan”; The Federal Reserve Board; May 2003 f. Bernanke, Ben; ibid. C and: Adler, Gustavo; Castro, Pedro; Tovar, Camilo; “Does Central Bank Capital Matter for Monetary Policy?”; IMF Working Paper 12 / 60; Feb 2012 over many years, or at least reported losses as a Meanwhile, the Eurosystem is marching towards consequence of it, and still continued to operate. the EUR 720 billion mark in government bonds that This was particularly noticeable in the case of it has taken onto its books through the member central banks in emerging market countries, since central banks. By the end of 2016, this figure should they occasionally had to make write-downs on have risen to around EUR 1.5 trillion Euros – that currency losses. For instance, the Chilean central will then represent just over 15 % of the Euro area’s bank suffered losses for 20 years until its equity gross public debt. was completely depleted7 . The Swiss National Bank (“SNB”) had to accept heavy losses in 2015 on Whether, at the end of the day, helicopter its foreign currency holdings as a result of freely money will actually be deployed is doubtful, floating the Franc and was forced to point out that especially since, at least in the case of the ECB, a central bank could also have negative equity. multilateral treaties would have to be reviewed and There is no “legal obligation to liquidate” the bank, presumably altered. Article 123 TFEU (“Treaty on according to the SNB.8 the Functioning of the European Union”) prohibits the “the purchase … by the European Central Bank Alan Greenspan, the former Fed Chairman, also or national central banks of debt instruments” pointed out that a central bank itself, even if it has from national governments. However, this negative equity, can create an unlimited amount of would be the case if there was a permanent its own money and his position was strengthened monetisation. In addition, article 130 TFEU by his successor Ben defines the independence of the Eurosystem, i. e. Bernanke:9 independence must not only be guaranteed for the “In short, one could make an economic case that the balance sheet of the Central Bank should be of marginal relevance at best to the determination of monetary policy.”10 – Ben Bernanke ECB but also for national central banks that belong to the Euro currency area. Nevertheless, attention should be paid to this as a risk scenario. Indeed, Japan already seems to be making the first steps towards monetisation and helicopter money. By means of so-called “QQE” monetary policy (“qualitative & quantitative Helicopter Money easing”), the on-going financing of the public further, should not be underestimated. Tangible sector budget is de facto already being carried out assets, similarly to equities, should be among the since the central bank is buying up almost 100 % winners, because they are most likely to be able to of new government bond issues, while it already compensate for rising inflation expectations. holds Japanese government debt in an amount of over 30 % of the gross public debt on its books. Helicopter money would be a new stage of financial repression. The bottom line is: Through monetisation or helicopter money, monetary policy would play second fiddle to fiscal policy and would de facto lose its independence. There would be a “fiscal dominance”. Monetisation reduces the incentive for sound fiscal policy. This would be associated with an expected loss of confidence in monetary policy and thus, ultimately, in monetary stability, which should drive inflation (expectations). For investors, this would mean that, while the respective central bank should be able to continue keeping the yield curve under control and on a low / negative level, the danger that asset price inflation will result from permanently cheap money (“flight into tangible assets”), since investors will be pushed up the risk ladder further and Imprint Allianz Global Investors GmbH Bockenheimer Landstr. 42 – 44 60323 Frankfurt am Main Global Capital Markets & Thematic Research Hans-Jörg Naumer (hjn), Ann-Katrin Petersen (akp), Stefan Scheurer (st) Allianz Global Investors www.twitter.com/AllianzGI_DE Data origin – if not otherwise noted: Thomson Financial Datastream. 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