Thursday, August 28, 2014

New Article Encourages Central Banks to give People Cash

Here is an article so interesting we just cannot pass up posting a link to it here. This is an article appearing online in Foreign Affairs published by the Council on Foreign Relations (CFR). The authors are encouraging Central Banks to try something new. Giving away free cash to people to stimulate consumer spending and demand. Let's look at this article to see if it provides any insights into the status of the current monetary system and if it provides clues change might be coming.

The first thing to say about this article is that is that this will not be an analysis of the ideology behind this proposal or whether it would work or not. At first glance some readers will think this is a crazy idea and others will think they like the sound of the idea of getting free cash from their local Central Bank.

But the premise behind this article is what interests us here. The article is basically saying that current Central Bank policies are failing. It openly admits that the various efforts by the US FED to stimulate the economy and stave off recession and/or depression are not working. For example, here is a quote from the article:

"Today, most economists agree that like Japan in the late 1990s, the global economy is suffering from insufficient spending, a problem that stems from a larger failure of governance. Central banks, including the U.S. Federal Reserve, have taken aggressive action, consistently lowering interest rates such that today they hover near zero. They have also pumped trillions of dollars’ worth of new money into the financial system. Yet such policies have only fed a damaging cycle of booms and busts, warping incentives and distorting asset prices, and now economic growth is stagnating while inequality gets worse."

And we have this quote:

"To some extent, low inflation reflects intense competition in an increasingly globalized economy. But it also occurs when people and businesses are too hesitant to spend their money, which keeps unemployment high and wage growth low. In the eurozone, inflation has recently dropped perilously close to zero. And some countries, such as Portugal and Spain, may already be experiencing deflation. At best, the current policies are not working; at worst, they will lead to further instability and prolonged stagnation."

So the solution according to authors Mark Blyth and Eric Lonergan is:

"It’s well past time, then, for U.S. policymakers -- as well as their counterparts in other developed countries -- to consider a version of Friedman’s helicopter drops. In the short term, such cash transfers could jump-start the economy. Over the long term, they could reduce dependence on the banking system for growth and reverse the trend of rising inequality. The transfers wouldn’t cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them."

We encourage readers here to read the entire article. The authors really are promoting the idea of simple direct cash transfers to individuals as better policy than the existing policies of zero interest rates, QE, etc. which they argue are inefficient tools that are not working anyway. So why not try something new?

Readers can decide if they think this proposal could really work or not. That is not our purpose here. Our purpose is to note that this article in a leading global establishment publication is stating that current policies are not working and that they believe they are not going to work in the future. This is the reason they are calling for a radical new approach to the problem.

This article is therefore supportive of people like Jim Rickards, Peter Schiff, Micheal Pento, Andrew Huszar, Jim Sinclair and others we have cited here that the economy is not in true recovery. It supports their view that this will lead to a new round of money easing next year by the FED.

The article points out all the obstacles in the way of implementing their proposal including ideology. But one of the bigggest obstacles they mention is the FED itself as we see in this quote:

"The most powerful sources of resistance to cash transfers are political and ideological. In the United States, for example, the Fed is extremely resistant to legislative changes affecting monetary policy for fear of congressional actions that would limit its freedom of action in a future crisis (such as preventing it from bailing out foreign banks). "

What can we take from this article?

If the authors are right, it means that current Central Bank policies are not working and we will not get a true economic recovery (just some asset bubbles like stocks). They want the Central Banks to admit this and adopt their idea of just giving people direct cash transfers. But they admit the FED itself is a leading opponent of this idea and there is no reason to think right now this will actually happen.

All this suggests that those calling for weakening in the economy by next year may be right. And that could lead to more easy money policies by Central Banks including the FED. And that could be a trigger that leads to monetary system change which is what we watch for here.

Update: In an effort to be fair and balanced, here is a review of this article which takes an opposite view.

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