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
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Data origin – if not otherwise noted:
Thomson Financial Datastream.
Calendar date of data – if not otherwise noted:
April 2016
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