Albert Edwards is back from Jamaica, where he survived an earthquake and narrowly dodged a tsunami. (Bears are resilient creatures.)
“I tweeted at the time that I was ready to run to the higher ground of the Jamaica Inn veranda if necessary”, Albert writes on Thursday, reliving the drama, which he also live-tweeted.
If you’re wondering whether Albert was overestimating his ability to outrun a tsunami, he admits that’s possible: “I may though have been displaying the same behavioural characteristic as the equity bulls in the market – complacency that they can react quickly to changing events and get out at the top!”
It's a sign! The earth was actually moving as i was lying on my sun-bed at Jamaica Inn listening to Russell Napier's podcast. I'm currently looking out to sea checking if the tide is about to go out. https://t.co/o1iuXkSa5X
— Albert Edwards (@albertedwards99) January 28, 2020
But the big news on Thursday from Edwards is that he’s out suggesting that following the deflationary bust he still sees as inevitable, the “Ice Age” will be over and the world will begin to thaw.
That’s not necessarily a positive development if it pans out as Edwards says it probably will, though.
In essence, he argues that, following the next downturn, the world will resort to helicopter money, which will be “successful” in taking a blow torch to the permafrost, even as it rapidly erodes everyone’s purchasing power.
Here’s the first paragraph of Albert’s Thursday note:
Notwithstanding short-term market gyrations, I am now more convinced than ever before that the coming deflationary bust will take the US 30y yield below zero. I am also convinced that helicopter money will be the chosen way out of this deflationary quagmire, especially as it becomes increasingly clear that there is now no way left to reverse every government’s exploding fiscal liabilities. The Ice Age is nearing the end.
That captures the gist of it, and it echoes the sentiments of others who have generally argued that MMT, or some version of it, will become increasingly palatable politically once it’s obvious that governments have no other way to fund their liabilities.
“The sources of this debt explosion are well known and documented with, for example, the unfunded liability of an aging population boosting Medicare expenses and the off-budget social security deficit spiraling upwards over the forecast period”, Albert writes, adding that “in the face of it, this ticking bomb requires aggressive and immediate measures to retrench the public-sector deficits and/or renege on promised future benefits”.
Obviously, reneging on promised future benefits isn’t a tenable solution, and so, the helicopters it will be.
Again, this isn’t some outlandish thesis. Albert’s take on this is shared by many, and not just those predisposed to hyperbole. The question isn’t so much whether this kind of direct financing is in the cards, but whether it will ultimately lead to spiraling inflation. Here’s Albert’s take:
Helicopter money is on its way. You can call it Modern Monetary Theory (MMT), you can call it ‘Fiscal and Monetary Co-operation’, or you can call it whatever you like, but there is only one realistic way out of this mess – and that is for governments to inflate away their debts. However, since much of these liabilities will rise with the CPI, like state pension benefits and healthcare, and cannot be inflated away, there will have to be more emphasis on deflating the liabilities that can actually be shrunk via rapid inflation.
MMT advocates will, of course, dispute the idea that rapid inflation is inevitable. And as we saw last year during the “faint heartbeat” exchange between Jerome Powell and Alexandria Ocasio-Cortez, Progressives are well aware that the flattening of the Phillips curve can be utilized to argue for funding expensive agenda items with MMT-esque partnerships between monetary and fiscal policy.
Still, most economists and analysts aren’t ready to countenance the idea that MMT can be safely implemented, where “safely” means that the resultant inflation can be kept under control and, relatedly, that politicians can be trusted not to abuse what would amount to unfettered access to the printing presses.
That’s because unlike QE (which disproportionately benefits those in whose hands financial assets are concentrated), monetary-fiscal partnerships will directly benefit everyday people. We’ve discussed this at length previously, and Edwards spells it out in no uncertain terms.
“Mainlining liquidity directly into the veins of the global economy will be much more effective in boosting GDP than QE, which has largely injected liquidity only into the veins of the financial markets”, he writes, adding that “helicopter money will work for Joe Sixpack much more effectively than it will for Mike Moneybags – and so it will be widely popular”.
Therein lies the peril. It’s great that everyday people would benefit. But those people are also voters. Try wrenching the keys to the helicopters from the hands of a populist (left-wing or right-wing) once the public is thoroughly enamored with the near-term benefits of mainlined liquidity.
Ultimately, Albert’s message on Thursday is simple. And here it is:
As helicopter money becomes increasingly inevitable, the big news is that we are calling for the thawing of the Ice Age after the next recession – whenever that arrives. But a deflationary bust, which will take US 10y yields to around -1% (and 30y yields negative), will come first and enable this massive shift in policy to occur.