On markets and helicopters

Rescue helicopter Some economists are warming to the idea that an emergency "helicopter money" drop is needed

Stock markets have continued to take off in recent weeks. The UK and US markets are now back where they were before the 2008 crisis, having risen more than 9% since the start of the year.

Clearly, investors aren't taking their cues from the real economy, at least in the UK. Nor do they seem to paying much attention to governments. But are they expecting too much from the world's central banks?

As I mentioned on the television news last night, the record level of the Dow Jones industrial index, and the very close-to-record level of the much more important S&P 500 index, are partly a reflection of the good news that has been coming out of the US economy - at least the privately owned part of it.

You can't say the public side of things looks very attractive right now, as President Obama and the Republican leadership in Washington continue to argue about the Budget.


But if investors are ignoring the politicians, for the time being, they are definitely not ignoring the central bankers.

In fact, it's almost certainly the signals coming out of the world's central banks that have done most to send stock markets up this year.

In their different ways, the US Federal Reserve, the Bank of England and the Bank of Japan have all made clear that will continue to offer massive support for the economy in the form of cheap money - even if and when the recovery finally starts to gather some steam.

In other words, there will continue to be a lot of money sloshing about the world, looking for a home. And investors are betting that home will be financial assets.

Janet Yellen, vice-chair of the US central bank and the person many expect to succeed Ben Bernanke, is the latest senior figure to contribute to this trend, in a speech earlier this week.

The message of her speech was that the Fed would continue spending money for some time to come.

There's been more "noise" in recent debates about the Bank of England's policy, with all the talk about nominal income targeting, negative interest rates, and other radical steps.

But you can't help noticing that all of that discussion has been about new and exciting ways to stimulate the economy.

More easing?

There has not been much discussion about new ways to tighten. Indeed, many in the City think the Monetary Policy Committee might vote for more quantitative easing as early as tomorrow.

Sushil Wadhwani, a former member of the Monetary Policy Committee and distinguished economist, made his own contribution to that debate in a lecture last night. I recommend you read it, for the excellent charts alone.

He makes an interesting argument, pointing out how the connection between loose monetary policy and stock markets has changed in the last decade or so.

In the 1970s and 1980s, stock prices fell when inflation expectations went up.

That is one reason why academics and policy makers thought central bank efforts to cut inflation would stimulate growth, and a failure to control inflation would always hurt it.

But now we are in a very low interest rate, potentially deflationary world, Wadhwani says the relationship now works the other way.

If central bankers push up expectations of future inflation, that now seems likely to push the stock market up.

Tied hands

Why? You need to read the speech for the full explanation, but the basic idea is that higher inflation can help push down the real cost of borrowing - the real interest rate - at times when nominal interest rates can't go any lower.

What does that mean for real-life policy making?

Well, Sir Mervyn King will be relieved to hear that Wadhwani does not like the idea of targeting nominal GDP - the cash value of the economy - instead of inflation.

Like Sir Mervyn, he thinks it's not flexible enough and risks tying the central bank's hands.

But Sir Mervyn will not like where the speech goes next. Wadhwani thinks the best thing that the central bank could do to stimulate the economy would be to print money to fund a one-off fiscal stimulus, sending a voucher to every household in the country, which they could spend however they wished.

This is our old friend, "helicopter money", which Wadhwani believes could help boost economic activity without causing serious problems for inflation. (In fact, he first proposed this with another economist Michael Dicks in 2011).

If you wanted to focus on investment, rather than consumption, he adds you could use the money to fund generous new investment allowances for UK businesses, instead.

Long list

There are lots of possible objections to this, some of which I've debated before (see, for example, Should Bank start the helicopter?). Wadhwani has some interesting answers, which I hope to return to another time.

The larger point is that there is now a surprisingly long list of respected figures who have said a "helicopter drop" - a dose of money-financed fiscal stimulus which is never paid back - is worth talking about, even if they do not necessarily want to do it right away.

Adair Turner is one example. Willem Buiter is another. Ben Bernanke himself spoke about it in 2002.

Wadhwani himself has thought about the scheme in enough detail to conclude that it would be "desirable if the Chancellor of the Exchequer himself would sign the vouchers".

I can't help thinking that is unlikely. (He could always get Ed Balls to sign them, to hedge his bets.)

Wherever the debate ends up, you can see why people in the City would be expecting the cheap money era to continue in the UK for a long time to come. But sooner or later, the rise in equity prices will need to be matched by rising corporate earnings.

About two-thirds of the earnings of the companies in the FTSE come from outside the UK.

The sad reality is that most of the world - certainly outside Europe - is growing a lot faster than the UK. But sooner or later we do need the real economy to start to catch up with all these enthusiastic investors.

Otherwise those stock prices might very well come back down to earth.

Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

So it's goodbye from me

After 11 years at the BBC, I'm leaving for a new role in the City.

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  • rate this

    Comment number 92.

    From my own little corner.

    I object to the Government using MY taxes to undermine MY savings interest.

    I would rather pay a higher tax and get some reward for the years of saving I have done for my retirement.

  • rate this

    Comment number 91.

    American industry is sitting on $1.7 TN in cash. If they aren't going to invest it to create jobs here in the US, then the government should tax it away from them and create US jobs for them. The money has to go somewhere. Better to invest it here in the US than build more plants and export more jobs overseas.

  • Comment number 90.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 89.

    PPI repayments are helicopter money but doing little to improve things just another excuse the banks use to continue with taxpayer support!
    Stock markets moving so roulette banks making bets no movement means no bets paying off so need to keep things churning.
    Suggest solution of future threats ie capital gains tax on all property sales from 2015 onwards will get house prices realistic

  • rate this

    Comment number 88.

    We have already had one 'helicopter' drop to UK consumers through their PPI claims. £6.5 billion and still growing. This has not helped so why would doing more of the same?

  • rate this

    Comment number 87.

    The helicopters have been flying around throwing out money in the US, UK and Europe since 2008, which is why the S&P, etc. have all been rising despite a bunch of sick economies, with excess govt. & private debt, high unemployment. Central bankers cannot tell the difference between a light at the end of the tunnel and the speeding train; a bunch of irresponsible idiots.

  • rate this

    Comment number 86.

    @68 Arthur
    Only question with helicopter money is which pockets will it end up in, if in those already well padded then impact limited. & that is the policy implementation problem.
    Exactly. Which is why cutting Fuel Duty/FDE benefits the most people. Switching the tax to the top rate of tax hits the least people but even they gain from it.

  • Comment number 85.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 84.

    This is known as "the dead cat bounce" shares will dive again in the not too distant future. Assisted with the continued issues within the US and EU economies. Neither of which has really addressed the underlying issue and that is national and personal debt. Smart money is riding this bubble but will reduce its exposure as time goes on. Obama is trying to talk up the economy just as Barroso.

  • rate this

    Comment number 83.

    What a Ponzi scheme. Of course it can't last and it won't.
    ~ ~ ~
    Agreed. If GO is wise, thoughtful & sharp, he'll knock it on head in Budget & take back control of the economy.

    For whatever reason, he (&PM) are letting it drift with no-one really sure of direction arising from the drift.

    Golfing equiv. is 'Stuck in the rough, among the trees, not too sure so hitting & hoping.'

  • Comment number 82.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 81.

    Helicopter cash is all very well, but only if spent on products made in this country and not on Chinese imports which leads to more balance of payments problems

  • rate this

    Comment number 80.

    No74 Matt,
    'Mr Brown's spending plans'
    Are you able to confirm that the Witney 'boy wonder' was the only party leader calling for more spending at the last election?

  • rate this

    Comment number 79.

    Yes, that's a good article. Thanks for linking it.

    Coming from a german / Bundesbank-is-good perspective, the whole debate does have a certain "US/UK/Canadian central bankers are bonkers" quality to it, I'm afraid.

    But naturally, perspectives differ, and its interesting to see the case argued out. And also some frank acknowledgement of how little effect QE has had.

  • rate this

    Comment number 78.

    So what is wrong with looser policy on public spending where you stop paying the 'idle' benefits because they have jobs paying taxes and you stop the degradation of public assets like transport infrastructure because public and private organisations are 'put to work'. No stronger case than building council houses (which these days is built by the private sector) for rent & equity accumulation.

  • rate this

    Comment number 77.

    As FTAlphaville mentioned, the market has been nationalised.

    They will print forever and then more and all the asset bubbles will blow through the roof. And the crash that will come will be huge and will make 2007 looks like minor crisis.

    How irresponsible and short-termism is this approach,

    Hope there will be a party in the future that will put CBs in jail.
    Did we voted for this? NO!

  • rate this

    Comment number 76.

    Steffie, on the levels of Stock Exchanges, I would point out that these 'highs' have only been achieved with artificially suppressed interest rates.

    Inflation is not currently related to interest rates. It is currently largely a product of weak currency {also due to suppressed interest rates}, high commodity prices and taxation.

  • rate this

    Comment number 75.

    I have switched what is, for me, a lot of money from a maturing building society bond to the stock market. The reason is straightforward. I have doubled my income. I have invested only in FTSE 100 companies. It seems to me that a lot of people are coming to similar conclusions and switching. But, Steph, the GDP figures you seem to be basing your argument on are clearly plain wrong

  • rate this

    Comment number 74.

    69 rrmemberderutti

    No the plan is to defraud savers to prop up Gordon browns 2008 spending promises .

  • rate this

    Comment number 73.

    @53. John_from_Hendon

    If they allow the bubble to deflate the "wrong" people will lose money. It's the same reason that western governments honoured bank bonds at face value in 2008. It doesn't matter if your equity in your home is wiped out, but that property is equity the bank has booked at a high value. If that value falls, banks lose money, IMPORTANT people may lose money. That's not allowed


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