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Weekly Comment icon - Week 25, 2016According to a recent Telegraph article, one of the wildest ideas yet to hit the U.S. presidential campaign might soon become a reality. Forget building walls with the Mexicans, radical religious shenanigans or trade policy, Donald Trump has claimed that the U.S. national debt, standing at more than $19 trillion, does not need to be repaid. (Also discussed in a previous article – The U.S. Elections and the Markets)

“This is the U.S. Government, you never have to default, because you just print the money” Trump declared live on air recently. For those of us who work in the investment industry and macroeconomic world, the term “helicopter money” is not a new concept and certainly not a new idea invented by Trump. But having the U.S. Central Bank issue new money to pay for current or future government spending and eventually inflate away the debt problem is now being talked about by the Republican presidential nominee (and potential leader of the free world).

This idea often associated with economic basket cases such as Venezuela and Zimbabwe hits at the very fabric of the concept of the U.S. Dollar’s status as the AAA reserve currency of the world: the U.S. T-Bill is invariably used as the risk free rate because of that status and the perception that the U.S. Government will never default on its obligations. Sure, a bit of QE here and there never hurt anyone, but full-scale helicopter money isn’t in the risk premia of a risk-free rate!

With the central banks in Japan and Europe getting close to desperation in their battle against deflation and their economies’ failure to move past 6 o’clock on the big (Kondratieff) cycle, recent announcements and talk of experimental mass money printing is becoming more accepted in both regions. Conceptualised by Milton Friedman, the Nobel Prize winning economist, helicopter money from central banks can be used to fund tax cut or infrastructure spending in an attempt to boost growth. Certainly zero interest rates haven’t done that job anywhere yet.

Week 25, 2016 Weekly Comment Chart - Gold PriceCentral bank money printing might appear to be a free lunch to the voters but it only fixes the problem in the short term. The last time we had these rising levels of debt and central bank intervention was just before WWII. No wonder the gold price is running! (See chart) There is no need to fear runaway inflation yet, as only the U.S. has even mildly rising inflation pressure. The helicopter money story is one thing, but of greater concern is that the fear of political risk is rising across the globe. In DM, EM and FM people are very worried about their leaders and lack of any leadership.

Given that President Obama couldn’t deliver on his pre-election promises to close Guantanamo Bay prison in his eight-year tenure, it seems unlikely that Trump’s grand vision of a wall with Mexico would materialize, but a silent promise of helicopter money? That may have more serious and damaging long-term consequences for the Trump voters.


Helicopter Money


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