The end game of quantitative easing policies is to get economies moving by providing more monetary stimulus. But if the banks won’t lend or individuals won’t borrow then it eventually fails or loses effectiveness. The next step on the great monetary experiment is “helicopter money” and it is being spoken of more and more. The term helicopter money is essentially a monetary policy tool whereby central banks distribute cash directly to individuals in order to stimulate the economy. It is largely theoretical but it is predicated on people spending money if it is directly credited to their bank accounts. As the limits of central bank quantitative easing policies is being reached the chatter about it is rising.
One of Australia’s leading bond fund managers, Vimal Gor from BT Investment Management, spoke about exactly this and warned, in his latest monthly newsletter, that the unprecedented power of central banks has already shifted society from being purely capitalistic to “communist-lite”. In a largely-philosophical article Mr Gor highlights how pure capitalism has checks and balances whereby markets which are mispriced will see capital allocated or withdrawn. He then points to the relatively recent phenomenon of central banks moving risk pricing out of the hands of private sector agents and into their own hands.
Investors and traders will act in a predictable way when there is a massive, price insensitive buyer of financial assets. They will effectively “front-run” the central bank, buy bonds and then sell them to the central bank. When investors no longer fear the moral hazard of buying assets and losing money because the central bank is effectively keeping assets priced at historically high levels, he asks whether society has morphed away from capitalism. One of the problems Gor sees is the view of senior policy makers who think they can control the economy and have it respond without unintended consequences. The fact the very central bankers who are making these decisions are largely unelected, academic bureaucrats would seem to back up his viewpoint.