Helicopter Money Gathers Momentum

I put the odds that we’re already in the early stages of a recession at about 76%. All the signs from the U.S. economy are negative.

The current behavior in the stock market is exactly what I’ve expected to see at the beginning of a recession, too. Stock markets are leading indicators of recession. They typically go down about six months before recessions begin.

Mainstream economists are late to realize this. A year from now they’ll say “January or early February 2016 is when the recession started.” At that point, it won’t be useful information. But you can see around the corner if you’re looking at the right information.

There’s been no real wage growth for example. Other leading indicators such as declining world trade, declining manufacturing, inventory-to-sales ratios and auto sales also suggest that we’re heading into a recession.

Deflationary forces are still strong, making the Fed’s goal of producing inflation even more urgent. Every quarter that goes by brings forward the day of reckoning for the global elites. They need inflation because that’s the only way out the sovereign debt problem.

Yet central banks haven’t be able to generate the inflation they think they need to restore growth to the global economy. Here in the U.S., the Fed has failed to produce inflation for seven years through QE1, QE2 and QE3. The European Central Bank has also failed, and China is currently failing.

The question for the global elites is: Where will inflation come from?

A lot of people assume that all that’s required to produce inflation is just print money. That’s what Milton Friedman said. But it’s not true. Printing money by itself does not cause inflation. People must do something with the money. They need borrow, spend or invest it. Banks need to lend it or put it into projects. The new money can’t just sit idle.

Printing money is only half of what’s necessary to produce inflation. The other half is lending that new money… having people go out and spend it… have banks leverage that money through credit creation and so on. That has not happened.

It’s not happening because corporate and banking decision makers are still licking their wounds from the meltdown of 2008. Everyday people have been saving money and paying down their debt. That’s why we’re still going through a debt leveraging cycle. That’s also why quantitative easing has failed. The money hasn’t gone out into the real economy. It’s been tied up in the banking sector.

Any bank with excess reserves at the Federal Reserve could take them and use it as a base to lend money. But they’re not, so the whole scheme isn’t working. What’s called the “monetary transmission mechanism” is broken.

First, helicopter money amounts to direct government spending to stimulate the economy. The idea is to force spending since the private sector isn’t doing enough right now.

Who does that spending? The government.

This policy will take us back to the Great Depression and John Maynard Keynes. He argued that government spending could lift the economy out of depression. It’s Keynesism 101.

- Source, Jim Rickards via the Daily Reckoning