Bubblenomics and The Helicopter Money Mystery
I want you to imagine the following scenario.
You go to your mailbox and see an envelope from the U.S. Department of the Treasury.
You carefully open the letter as your pulse starts racing, and you discover, it is a bill for $15,680, for Helicopter Money Services!
How would you react?
“Helicopter Money” is a concept originally attributed to Nobel Laureate, Milton Friedman when he was creating a thought experiment as to what options the Federal Reserve would have at its disposal if everything they had done to stimulate an economy had failed.
“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”
Friedman never intended this to be a serious monetary proposal. Yet today, this idea is being explored and implemented in the hallowed halls of government.
Rest assured, you will never receive a bill from the government for $15,680 for Helicopter Money Services!.
If any government did this there would be an immediate revolt. Instead, governments always create an IOU which becomes part of the National debt.
What I am trying to illustrate is that there are 141 million taxpayers in the United States. The recent COVID-19 bailout amounted to $2.2 trillion.
When you divide the $2.2 trillion by 141 million, you arrive at what is your share, as a taxpayer of the bailout, which equals $15,680.
If you were presented with this bill, how would you pay it?
Or is it best to do what politicians always do and kick the bill down the road and allow future generations to pay that debt back?
In case you are not aware of it, the US National Debt currently stands at around $26 trillion. When you divide that amount by 141 million taxpayers your share of the National debt currently is around $184,397. That is on top of any other debts you might currently have.
These are very challenging times. The purpose of this article is to specifically address these questions without becoming political.
My ongoing frustration as I study all of the coverage of the COVID-19 fallout is a failure of the media to recognize the “Economic BUBBLE” that the world economy had become.
All of the coverage focuses on the horror of the coronavirus. COVID-19 is an absolutely horrific event that has gripped the world! No doubt about it.
But I have not seen any coverage that has discussed, or even mentioned how the American and World economies had become the Mother of all Bubbles. Coronavirus is a catalyst in the same way that Lehman Brothers, Bernie Madoff, 9/11 and Enron were catalysts.
All of the attention has been on the PIN which burst the bubble. I think it is equally important to draw attention to how Bubbles are created and how they always end.
When Coronavirus passes we still need to return to our respectful economies and unless we understand what created this BUBBLE we will be doomed to create another worse one.
Over the coming months, you will see every type of editorial written drawing conclusions on what happened on who is responsible. Today the popular opinion is that the economy was doing great and then the coronavirus came along and ruined everything for everybody. That my dear trader represents very lazy logic. Yes, the economy is in lockdown because of COVID-19 but let’s look at some important facts. Before doing so we need to look at the custodians of the American economy, the Federal Reserve Bank.
The Federal Reserve Bank was founded in 1913 to specifically safeguard a stable unit of currency, keep inflation low, provide liquidity to the monetary system and create an economy where maximum employment would occur. Since its founding, the Fed has been responsible for the largest bubbles in history. This time is no different. All bubbles are created when the Fed lowers interest rates to stimulate borrowing in the economy. This “cheap” cash eventually creates malinvestment causing the bubble to form. Once the Fed deems that the economy is overheating, they raise interest rates. This often causes the bubble to burst, and an economic downturn results as the bubble bursts and people cannot borrow as cheaply anymore. To foster an environment of recovery, the Fed then lowers interest rates again to boost investment, stimulate spending and cause the entire cycle to repeat.
In the most recent economic cycle from 2008 to 2020 the Central banks across the globe use a tool known as quantitative easing to expand private credit, lower interest rates, and increase investment and commercial activity. QE, as it is referred to, is just a scholastic term for turning on the printing press and flooding the economy with new money.
In 2008, Gross Domestic Product in The United States was $15 trillion dollars. Our National Debt was $10 trillion.
Today, in 2020 Gross Domestic Product is at $19 trillion. But our National Debt is at $26 trillion dollars.
In otherwords, the Quantitative Easing which the Fed has been engaged in, has added $16 trillion dollars of new debt to the economy while only growing the economic output by $4 trillion.
This spending/debt binge is unlike anything we have witnessed before. The Fed and government are adding $4 of new debt for $1 of productivity. In other words, debt is growing four times faster than GDP. This massive imbalance cannot be sustained and is the very heart of our economy. If the Fed stops the printing press, the growth is guaranteed to stop. If the Fed continues the Quantitative Easing the debt binge continues and the currency continues to be devalued.
This is where we were before coronavirus. It is also what we will return to after coronavirus unless our leaders decide to make some major changes.
We live in an exponential age and among the greatest shortcomings of the human race is our inability to understand the exponential function.
When the amount of something increases faster during a shorter duration it is said to have exponential growth. Exponential growth is a wonderful thing if it is occurring to an asset. However, when it occurs to a liability it is among the most destructive thing that a civilization will ever witness. Warren Buffet once quipped that “compound interest is the eighth wonder of the world.” He is definitely correct. But compound interest, when it is a liability is what makes slaves of civilizations.
Earlier in this article, I shared some metrics on the Federal Reserve’s purpose and charter as being the custodian of the American economy.
You decide for yourself over how well they have done in:
Maintaining a Stable Unit of Currency
Keeping Inflation Low
When Coronavirus is firmly in the rearview mirror we all have to live in the economy again. Helicopter Money which was never meant to be taken as a serious monetary policy is now firmly in place as “the thing” that will rescue the economy. For me, it is fundamentally worrisome. In 1987, when the Black Monday Stock Market Crash occurred the entire debt of the United States, which it had incurred since its founding was $2.3 trillion.
Today, the COVID-19 stimulus bill is almost equivalent to that amount. And more importantly, there is talk about a second larger round of stimulus being released next month.
I want to be optimistic, but I’ve seen this movie before.
The alternative which I would suggest that our leaders should consider is a DEBT Jubilee or debt forgiveness program which would allow the economy to reset from a fresh starting point.
A program of this nature would do much more to ensure the vitality of our economy than “Helicopter Money.”
While I have shared my opinion with you about what I see is the fundamental current economic environment, I want to be clear that I never let my opinion interfere with my trading decisions.
My reality is always formed by what I see, hear, feel and understand. I have come to appreciate that what I see, hear, feel and understand is a very small universe indeed. This is why I use artificial intelligence, neural networks, and machine learning to guide my trading decisions.
You have probably heard the old adage, that bull markets take the stairs and bear markets take the elevator.
Keep in mind that it took the S&P500 290 days to climb from 2351 to 3393. This was a gain of 43%.
It only took 24 trading sessions to give all of those gains back, and artificial intelligence caught the move, every step of the way.
Charlie Munger is Warren Buffets’ partner at Berkshire Hathaway. One of my favorite Mungerisms is “Knowing what you don’t know is more useful than being brilliant.”
As a trader, the risk is very clearly defined by recognizing that your knowledge will always be limited by what you see and hear and understand.
This is why neural networks, machine learning, and artificial intelligence are a necessity for today’s trader. When what “SHOULD” happen aligns with what “IS” happening some pretty explosive outcomes can occur and that is where you want to be as a trader. That is the promise of a.i. can make to you today.
The challenge of trading is the organization of information so that effective decision making can occur? How good have your decisions been over the past year? How do you think your trading decisions compare to a.i.? Mistakes are problematic for humans but for machine learning, it is the pathway to mastery and excellence. The real education in trading always lies in learning from the losers and completely understanding why something doesn’t work. More importantly, as a trader you want to focus your hard earned savings on what is proven to work.
The Vantagepoint A.I. forecasts are 87.4% accurate, one to three days in advance.
Most humans have a really hard time learning from bad experiences. The ego gets in the way, each and every time.
Since artificial intelligence has beaten humans in Poker, Chess, Jeopardy and Go!, do you really think trading is any different?
Let’s be careful out there.
We will continue to see tremendous volatility based upon these huge forces at work. Manage your risk or it will manage you.
Visit with us and check out the a.i. at our Next Live Training.
It’s not magic. It’s machine learning.
Make it count.