Helicopter Money and Zero Coupon Perpentual bonds

Dear PGM Capital Blog readers,
Eight years after the financial crisis, the world’s central banks are trying to boost the global economy as much as ever. Though having arguably prevented financial markets from falling into the abyss in 2008 by lowering interest rates, the central banks are adopting increasingly complex interventions, to which the world economy remains stubbornly immune.

HELICOPTER MONEY:
Helicopter money is an alternative to Quantitative Easing (QE) when interest rates are close to zero and the economy remains weak or enters recession.

Nobel winning economist Milton Friedman is known to be the one who coined the term ‘Helicopter Money’ in the now famous paper “The Optimum Quantity of Money”

It’s called helicopter money because of the illusion of dumping currency from the sky to people who will rapidly spend it, thereby creating demand, jobs and economic growth.

Originally used by Friedman to illustrate the effects of monetary policy on inflation and the costs of holding money, rather than an actual policy proposal, the concept has since then been increasingly discussed by economists as a serious alternative to monetary policy instruments such as quantitative easing.

According to its proponents, helicopter money would be a more efficient way to increase aggregate demand, especially in a situation of liquidity trap, when central banks have reached the so-called ‘zero lower bound‘.

PERPETUAL ZERO COUPON BONDS:
A zero-coupon bond (also discount bond or deep discount bond) is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity.

The zero-coupon bonds do not make any interest payments (which investment professionals often refer to as the “coupon”) until maturity.

For investors, this means that if you make an investment today in a zero-coupon bond that matures in 20 years, you won’t put a single penny worth of income in your pocket for two decades.

A Perpetual zero-coupon bond, is a bond with no maturity date. Therefore, it may be treated as equity, not as debt.

PGM CAPITAL ANALYSIS AND COMMENTS:

Helicopter Money:
Central banks can raise and lower interest rates and buy and sell securities, but that’s it. They can thereby make credit cheap and readily available, yet they can’t force banks to lend and consumers and businesses to borrow, spend and invest.

That undermines the effectiveness of QE; as the proverb says, you can lead a horse to water, but you can’t make it drink.

Today, developed countries are engaged not in shooting wars but wars against chronically slow economic growth. So the belief in close coordination between governments and central banks in spurring economic activity is back in vogue — thus helicopter money.

Zero Coupon Perpetual Bond:
A zero-coupon perpetual bond, allows a government to spend with impunity, since it would owe no interest, or would never have to pay the bond in any way.

Zero coupon, no maturity bonds held by a Central Bank, would be some bizarre construct, conferring no benefit on their owner (lender) and no real obligation on the issuer (borrower), but allowing for an almost direct injection of cash into the economy.

Presumably, the government could do anything with the cash raised, from embarking on infrastructure projects to issuing checks to the citizenry.

An interesting implication of a zero coupon perpetual bond is, that a central bank could never sell it if it wanted to quash inflation.

After all, who would buy a valueless security? In other words, by not being able to be sold in the open market, the security might deprive the Central Bank of its inflation-fighting power, finally will produce the inflation Central Banks have sought.

The inflation would finally ease the debt burden of the WEST, by making their currency it owes less valuable.

However, it would also hurt the middle class, which is already under pressure from wage stagnation, in the sense that households holding cash and other forms of paper wealth would see their capital evaporate.

The long-suffering middle classes would become even more stretched and almost certainly a great deal angrier.

The only way to protect your wealth from this new world of central bank intervention, is by holding physical precious metal outside the banking system.

Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that markets can remain longer irrational than that you can remain solvent and that prices of precious metals and the stock of their producers might be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Eric Panneflek