In Terminal Velocity (4)[i], the possibility and conditions precedent for the “Helicopter” to land at Jackson Hole were discussed. The specific landing conditions were identified in Terminal Velocity (5). These conditions were observed as a Global Economy running on fumes at stall speed, in addition to a deteriorating fiscal and political situation in Europe. The Financial Times summed up the situation in its reporting of the latest IMF Spring meeting with the following headline.
Central Bankers Say They Are Flying Blind[ii]
Allegedly, some delegates at the conference had admitted off-the-record, that they were operating in an environment in which the consequences of their actions at the “Zero-Bound” were unpredictable and unprecedented.
The situation became even more confused when it was reported that Bernanke will not be attending Jackson Hole this summer. His personal scheduling allegedly precludes him from making an appearance. It has been suggested that he wishes to avoid the kind of eulogy that greeted Greenspan on his last appearance there; and that he also wishes to allow his potential successors to emerge from his shadow.
This is a dangerous precedent; since it will now make the event a forum for speculation over his successor and the policies that they will follow. We have observed that Bullard[iii] and Yellen[iv] have brushed off their CV’s; and tried on the “Helicopter Pilot Suit”. Before they can take the controls however, they will have to deal with the competition; and also those who wish to ground the “Helicopter”.
Jackson Hole therefore becomes a diversion, distraction and dilution in varying degrees. No doubt the “Helicopter” will be spotted there, but the conditions will not be appropriate for it to land.
According to Sarah Bloom Raskin, the “Helicopter” will have a flight plan that will follow the Gini Coefficient coordinates[v]. By the Fed’s calculations, the low and middle income in America have become more reliant on debt; and more reliant on their homes as the single most important store of wealth. They have therefore been disproportionately impacted by the housing crash and weak economic recovery. It is the Fed’s intention therefore, to target this demographic with the “Helicopter”. QE that has flowed into financial assets, has so far passed them by; so it is time that they received some specific monetary stimulus. The Fed will therefore be buying the Mortgage Backed Assets with Cusips that match the Zip Codes of these neighbourhoods; in addition to providing more direct support from the “Helicopter”.
The New York Fed provided further academic support to Bloom Raskin’s thesis, in its latest study entitled “The Financial Crisis at the Kitchen Table: Trends in Household Debt and Credit”[vi]. The reader should note the careful choice of the term Kitchen Table. This clearly shows that the Fed is belatedly turning its attention, away from the banks, towards the beleaguered consumer.
The study found that debt has been reduced voluntarily and also through forced bank closures since the Bubble Peak. It also showed that auto-loans, followed by home loans defaulted the first; and that consumers tried to keep their revolving credit lines open, to survive during the crisis. Student loans remained elevated, whilst revolving credits and auto-loans were cut back during the crisis.
Revolving credit and auto loans have since recovered. The study did not find a significant correlation between declining home value and the demand for debt. This supports Bloom Raskin’s assertion that the low and middle income have had to subsist by maintaining a high level of debt, in order to finance necessary consumption; whilst at the same time cutting down non-essential debts. US Consumers are actually now having to use debt to manage their consumption, since they have low real incomes. The study remains unclear as to when normal consumption will pick up however. In effect, the consumer is also flying as blind as the policy maker.
In the public domain, fuel for the “Helicopter” has been pumped by the Pew Research Center[vii]. This research directly supports the analysis of Bloom Raskin and the New York Fed. The “93%” have not participated in the recovery, however the “7%” have prospered. Cleary the “93%” represents the low and middle income demographic and the “7%” represents the wealthy. The Pew group may not advocate a “Helicopter” solution, but its analysis does not conflict with such a policy outcome. Sensible, rather than partisan, debate is swiftly shifting to the taboo issue of income and wealth distribution, as the economy repeatedly fails to accelerate. It is clear that the “7%” don’t create economic growth, even though they have been supported by the Fed to do just that. Capitalism is not working the way the Federal Government and Fed wish it to, even though it is working to serve Capital as it is supposed to do; and it is now time for Plan B.
Bloomberg has joined the debate; and is actively promoting Janet Yellen to succeed Bernanke. The legend[viii] created by Bloomberg credits her with converting Bernanke from inflation zealot to “Helicopter” pilot.
The US Economy is therefore flying on auto-pilot, with the coordinates set at plus monthly $85 Billion per month in QE and minus Fiscal Sequester. There is zero indication that any of this will create greater demand and jobs; in fact it is more likely that the reverse will happen. It is flying in a Global Economy where the economic and political headwinds are getting stronger, so that it may stall. A stall, without a designated Pilot until 2014, means that momentum will be lost; even if a crash landing is averted. All is not lost however, since public opinion is being primed for the “Helicopter” landing. ETA may not be August at Jackson Hole however.
Fundamentally speaking, the policy makers have reached the point at which they have conceptually understood that monetary stimulus has pulled forward the valuation of future economic growth to the present in asset prices. There is however no economic growth to justify these valuations. Fiscal austerity further erodes the current growth picture; and makes the assets look overpriced. To avoid another crisis, money therefore needs to be placed in the hands of those who have the greatest probability of spending it. The challenge going-forward, is to get the capital markets to buy into this analysis.