Those looking for omens and portents that an economic collapse is approaching, that the endgame for Keynesian economics is close at hand, need look no further than the latest “helicopter money” initiative from the once-prudent and conservative Swiss.
To classically trained economists—there is no polite way to say this—Keynes was a madman because he ignored the first law of economics, which, paraphrased, is “There is no free lunch.” This is confusing to non-economists (i.e. most of us) because it somehow sidesteps the issue of, if his theories were so totally daft, why is the entire Western world following them?
Which brings to mind that old logic paradox, “Do hotdog buns sell faster in Peoria because they are fresher, or are they fresher because they sell faster?”
The Keynesian Curse
The point being, one thing may have nothing to do with the other. In the case of Keynes—and I have advanced this argument before—his innovative and novel views entered society’s collective unconscious about the same time that the various Western central banks (themselves “third-party agents” merely performing a service for their client-states) were looking for an economic template better suited to their own unique and highly unconventional principles.
Central banks are, in essence, lenders. They prosper in direct proportion to the amount of debt they have floated and the amount of interest they are regularly collecting. (In fact, in the U.S. ,the very same act created both the Federal Reserve and the IRS, and many experts have advanced the argument that the latter was intended as a mechanism to collect money due to the former.) (Source: “What Do Your IRS Taxes Really Pay For,” Infowars, April 9, 2010.)
To even suggest that a central banker would willingly espouse a strategy of “working hard and saving” can best be described as refreshingly naive. In fact, the sigma (probability) would be about the same as a career politician voluntarily asking for a pay cut because he or she felt a proper job was not being done.
In fact, most politicians typify the sentiment expressed by Antonio Banderas in the 2011 film Haywire—“I like the idea of me doing my job…more than I like the idea of someone else doing my job.”
Against such a philosophical backdrop—at the juncture when Keynes appeared on the scene—it is hardly surprising that traditional work-and-save economics was considerably less appealing to the central bankers than a new, untested theory from a fledgling economist suggesting that taking on all the debt you can handle (and then some) was the key to happiness and joy.
So—and, yes, I am aware we have only a few scant decades of data to work with—how has Keynes’ unique version of reality done so far? Don’t wait for me to tell you; reach your own conclusions. Look at Japan. Look at Greece, Italy, Spain, Portugal, and France. Look at Canada. Look at the U.S.
But when you look at the U.S., you have to look very closely indeed. When you are strolling on a typical city street for example, it is hard to immediately discern that as of 2015, more than 50% of all Americans were on some form of government assistance, including, scariest of all, food stamps. (Source: “We have crossed the Tipping Point,” ZeroHedge, December 9, 2015.)
Thinking the Unthinkable—Swiss to Vote on “Helicopter Money”
In light of the above analysis, it may be easier to digest the breaking news that Switzerland is now the first nation on the planet to be holding a referendum (ballot: June 5, 2016) to decide whether it should provide each citizen with a guaranteed stipend of $2,500 (U.S. equivalent) a month. Regardless of age or sex or background or even whether said individual is working.
This is, of course, the penultimate expression of the Keynesian viewpoint (what some are now calling the penultimate Keynesian insanity)—money for nothing. Money falling from the sky like rain.
Money that did not exist yesterday, created from thin air, to fix the world as we know it. Regular, ongoing money from your government with which to do as you please. Because you are awesome and we really appreciate you and besides, it is only ink and paper anyway, and we have lots of that.
Money because our economy is not working quite right and that wonderful Mr. Keynes assured us that this is how to solve the problem. Money because nothing else so far has worked, and those clever central planners assure us that this final, paradoxical step will finally make everything right again.
As drafted, the move, if passed, will be “temporary.” But we all know how that game ends. QE (remember?) was also supposed to be temporary, as was ZIRP. NIRP too. Canada’s Income Tax Act was guaranteed by its parliament to be temporary in order to pay for the First World War. But history shows us a really odd quirk of the human condition: give someone free money and they will get hooked—for life.
“[…] Under the proposed initiative, each adult would receive $2,500 per month, and each child would also receive 625 francs ($750) a month. The federal government estimates the cost of the proposal at 208 billion francs ($215 billion) a year. Around 153 billion francs ($155 billion) would have to be levied from taxes, while 55 billion francs ($60 billion) would be transferred from social insurance and social assistance spending. That is 30% of gross domestic product.”
“[…] The initiative’s backers say it aims to break the link between employment and income, with people entitled to guaranteed income regardless of whether they work.” (Source: “Switzerland to Hand Out $2500 Monthly,” Zerohedge, January 29, 2016.)
So How Will This End?
To the above proposal the scribes at Zerohedge added their own comments, quoting from an earlier editorial they themselves had written back when the notion was still merely theoretical:
“[…] You cannot simply print a piece of paper, sell it to yourself, and then use the virtual pieces of paper you just printed to buy your piece of paper to stimulate the economy. There’s no credibility in that whatsoever, and we don’t mean that in the somewhat academic language that everyone is now employing on the way to criticizing the Fed, the ECB, and the BoJ.”
“[…] And it will end only one way… The monetizing of state debt by the central bank is the engine of helicopter money. When the central state issues $1.0 trillion in bonds and drops the money into household bank accounts, the central bank buys the new bonds and promptly buries them in the bank’s balance sheet as an asset.”
“[…] The Japanese model is to lower interest rates to the point that the cost of issuing new sovereign debt is reduced to near-zero. Until, of course, the sovereign debt piles up into a mountain so vast that servicing the interest absorbs 40+% of all tax revenues.”
“[…] But the downsides of helicopter money are never mentioned, of course. Like QE (i.e. monetary stimulus), fiscal stimulus (helicopter money) will be sold as a temporary measure that quickly becomes permanent, as the economy will crater the moment it is withdrawn.” (Source: “Helicopter Money Is Coming,” Zerohedge, October 7, 2015.)
And here is my two cents:
Notwithstanding the serendipity (explained above) of Keynes’ theories arriving at the exact same moment in history when the central banks were looking for an excuse to dramatically expand their own balance sheets, the man was, as an economist, barking mad.
There was no free lunch then. There is no free lunch now.
The horror is not that he advanced his theories at all (in our society, each of us can say what we wish; that is why the rest of us are blessed with the ability to discern, to reason), but rather that his percepts were slyly adopted by groups of individuals (bankers, central planners, politicians) who unashamedly put their own interests ahead of everyone else’s.
The original “bargain” reached when central banks first assumed authority for the money supply of individual countries was that the politicians would be assured of a constant flow of cash precisely when they needed it. Over the last few centuries, the central planners have faithfully kept their part of the bargain: I have never seen a politician go hungry—have you?
But the final pricetag to society at large—debt piled on debt piled on debt to a degree that staggers the imagination, to a degree that mathematically is incapable of ever being repaid—may be more than mankind can afford.
If Switzerland goes this route (which virtually guarantees other countries will follow, or at least attempt to follow), they will perhaps initially believe they are following Keynes, but in reality, they will be taking a mere detour or side-trip on the larger roadmap of classical (Austrian) economics.
That is to say, their “helicopter money” will have in actuality been paid for and backed by “hard money,” by the accumulated prior savings and goodwill and reputation of the country since its very inception. That may perhaps carry the plan a year or two but then, I have no doubt, chaos will ultimately reign.