Bernanke's helicopter drops are not enough

Two years ago, early in 2006, I wrote, in America’s Suicidal Statecraft, that:

One of the more fascinating debates is whether, if and when we crash, we will have deflation or inflation - and either one in its most extreme form. Within this debate, we have such entertaining - or devastating - suggestions as the helicopter drop linked to the names of Friedman and Bernanke. Some forty years ago, one of the more beguiling habits of President Bokassa of the Central African Republic, was to fling handfuls of coins and paper money to his grateful people when he went on walkabouts among them. His little gesture drew the crowds, increased his popularity and nurtured his ambitions. Eventually, it helped to bring about his apotheosis as “Emperor Bokassa I of the Central African Empire”. He was crowned in a magnificent, Napoleon-like ceremony, costing $20 million that the country could not, of course afford; but it added circuses to the presidential appeal. Sadly, however, the fantasy was short-lived. Even his exuberant generosity could not prevent the Emperor’s eventual overthrow and imprisonment.

Assuredly, there will be many extreme as well as some more rational proposals when what seems to be the inevitable crash does arrive. By that time, we may have reached what one commentator has called “The End of the Western World we have known since 1945”, the United States dollar may have become a “monkey currency” like the Emperor Bokassa’s and any dollar notes that Chairman Bernanke might drop from helicopters might have even less real value than the paper money with which the Emperor showered his people on his Coronation Day, back in 1977.

We can readily understand the political and social motivations for Bernanke and his associates now that the crash has come. Governments and central banks in the West seem largely to share those motivations.

Already, the size of the helicopter drop goes far beyond anything dreamed of in the past. Not just one helicopter but whole squadrons of jumbos have been unloading what, in the case of the United States alone, must now exceed one trillion dollars.

One Harvard professor says that the American economy is so large that such a sum is not of great significance and he might still be unworried if the sum reached - as it probably will - two trillion or more. The European Union, the United Kingdom, Japan and others - even Russia in a sense - are conducting their own helicopter drops.

These will mainly help financial institutions. Unlike Bokassa flinging money to the presumed poor, Bernanke, Paulson and company are unloading their helicopters on the relatively rich - many of whom participated actively in creating the financial chaos.

At this stage, we cannot be precisely sure just what the longer-term motivation is for this splurging of “liquidity”. A natural impulse has been to stop panic and avoid such a precipitate collapse of the financial “system” that the whole world market economy would grind to a shuddering halt. That would hurt everybody; so everybody can be said to benefit, at least indirectly, from the helicopter drops.

Again, in 2006, I wrote:

There have been references by the new Fed Chairman - not entirely in jest - to the device of a helicopter drop to spread purchasing power to the masses, if that might become necessary to avoid a debilitating depression and deflation. Whether through the helicopter or otherwise, the option of printing more and more money to relieve the burden of debt and to keep the economy running at anything like acceptable levels, must have its attractions.

However, any such approach must bear in mind what happened during and after the German hyperinflation of 1923. Effectively, the economy collapsed into barter, much of the established society was destroyed and a new currency had to be installed. The collapse of the economy and the ruin of the society were seen by some to be factors in the rise to power of the extremist Nazi regime. While we cannot forecast that this would happen in the United States and while, further, we cannot paint a precise picture of the details that the process would entail, an attempt to extract the United States from its indebtedness through the unrestrained printing of money would certainly bring dramatic changes to the political, social, economic and strategic situation of the United States. The pattern of world power that might emerge is difficult to forecast in any detail or with any confidence. At the very least, it might hasten the advent of a period of acute instability as the United States was seen to lose its status as a superpower and a period of transition to some sort of new world leadership to ensue.

What we must try to be clear about is whether we have sufficiently sound prospects to justify our undertaking these kinds of “helicopter drops” in the light of the catastrophes they might themselves precipitate.

First, we must acknowledge that the financial “system” which has prevailed for at least the last decade and, in some ways, for the last 30 or 40 years, is dead. Any attempt to keep it on life support will only drag out and intensify the agony and risks to world security - strategic as well as economic.

The death of this financial “system” was inherent in its nature. It was a casino-type, speculative system which could live only in the short term. It always threatened catastrophe for the real economy. Ponzi elements were so entwined in it that as soon as people began to lose confidence in it the whole structure had necessarily to fall down.