Era of ‘helicopter money’ has landed, time for alarm

There are some strange things going on in financial markets around the world at present. In Japan, they are thinking about issuing bonds from the government to finance infrastructure. That, in itself, is not unusual but the drop dead point is that these bonds will be purchased by the Japanese Central Bank on a non-redeemable basis. In plain language that means they need never be repaid. It is the best example I can find of so-called ‘helicopter money’ which is effectively free finance.

Central Banks remain wedded to having interest rates close to — if not at — zero. This, too, is generating odd developments such as banks charging customers to hold their deposits. If you have a million quid on deposit with some German and Irish banks at year end they will charge you for the privilege.

All of this is yet another wake up call for those who think normality has returned to the global economy after the shocks of the financial crisis in 2008.

Certainly, headline economic growth has shown signs of life and employment is on the up. Yet the evidence of Central Banks hammering interest rates and opening the QE taps is proof positive that alarm bells are ringing loudly in officialdom.

It suggests the global economy is incapable of performing along normal long-term lines without emergency measures being adopted by policymakers.

Short-term it probably means more efforts prime the economy with cheap money. Some are arguing cash should be given directly to consumers as part of that strategy.

Normally, the men in white coats would take away any economist proposing such an idea, as it usually ends in rampant inflation and the erosion of savings. The Germans know all about that.

However, in the current environment it seems a determined effort will be made to find ways to flood economies with cash that stimulates spending.

That might sound easy but think about it. If you got €1,000 free in the morning would it be used for incremental spending or would you use it to pay down debt? The latter might not help stimulate the economy.

If you did spend it would just be on items you were planning to buy anyway in the coming months, so the effect is one-off ? More worryingly, what does it say about the sovereign value of money if we begin to give it away like confetti?

While this debate rages, another victim of ultra-low interest rates is emerging — pensions. Because interest rates have collapsed, pension funds are struggling to find assets with risk-free income that can fund their pension plans.

This is a huge issue for traditional businesses and the civil services because defined pensions exist in large scale across these employers in Europe, the US and UK.

Each day that passes we hear about another company or Government who owns up to the fact that their pension deficits have ballooned.

Brexit added to that by inducing further Bank of England rate cuts, which sliced pensions even more.

In response, it is now thought the UK pension regulator will demand companies redirect cashflows to helps shore up pensions. In turn, that turns down the flow of money available to invest and expand; a normal process which supports job creation.

Managing savings or assets is a tough challenge in this environment. With so-called risk-free rates — ie Central Bank deposit rates at zero — every other asset classes are being priced relative to that return.

This has stimulated demand for corporate bonds, equities, property and sovereign bonds, as investors have chased any level of nominal annual dividends.

It can be argued that this dynamic has created a form of bubble around some asset classes that will struggle if central banks move interest rates up in coming years.

Diversification is a key element of money management while this continues.

Not only do you have to spread your wealth across classes, including property, bonds, cash, commodities and equities but you also need a currency overlay as no one really has a clue where currencies are going next in a deeply volatile political world.

Owning US dollars, sterling and euros is a minimum basket to consider.

Ignore currency at your peril. If your assets were all in sterling, for example, your pot would be worth in euros 10% less in the past eight weeks without changing a thing. That would be a sour end to your summer.

  • Joe Gill is director of corporate broking with Goodbody Stockbrokers.


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