Mish's Global Economic Trend Analysis

Economic Illusions vs. Reality; Helicopter Drop, What Else?

Posted: 26 Dec 2015 05:10 PM PST

Without providing a link, ZeroHedge posted some comments today regarding "Helicopter Drop Theory" by Willem Buiter, Citibank's Chief Economist.

Willem Buiter on Failure of Monetary Policy

We believe that a common factor in the relatively low response of real economic activity to changes in asset prices and yields is probably the fact that the euro area remains highly leveraged. The total debt of households, non-financial enterprises and the general government sector as a share of GDP is higher now than it was at the beginning of the GFC.

The wealth effect of higher stock prices appears to do little to boost private consumer expenditure.

To the extent that monetary policy has had an effect on real activity, and will have some incremental effect on activity, it may not be entirely sustainable. This is because part of the effect has been by bringing forward demand from the future, such as major purchases, including for cars or construction. That suggests that monetary policy, even if and when it has been effective in stimulating activity, will run into diminishing returns even in sustaining the levels of activity it helped to boost.

Economic Illusions vs. Reality

I wholeheartedly agree with every point made above by Buiter. Actually, things are far worse than he stated. The problem is not just in Europe, but everywhere.

With their deflation-fighting tactics, central banks have accomplished five things, none of them any good.

Brought demand forward at the expense of future GDP
Encouraged more leverage
Increased speculation in financial assets
Created bubbles in equities and bonds
Mistook economic activity for what much of it really is: malinvestment

The solution is not more craziness, but rather an admission that central banks are themselves the source of the problem.

Of course Keynesian fools would never admit such a thing. Instead they promote more and more of what common sense and history proves cannot work.

Willem Buiter Proposes Helicopter Drop

"Helicopter money drops (what else?)"

Our conclusion is that, in a financially-challenged economy like the Eurozone, with policy rates close to the ELB, and with excessive leverage in both the public and private sectors, balance sheet expansion by the central bank alone may not be sufficient to boost aggregate demand by enough to achieve the inflation target in a sustained manner.

This is more than an academic curiosity. Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990. The balance sheet expansion of the Bank of Japan since the crisis has been remarkable but ineffective as regards the achievement of sustained positive inflation and, since 2000, the inflation target. The balance sheet of the Swiss National Bank has expanded even more impressively, again with no discernable impact on the inflation rate.

The case for helicopter money is therefore partly to ensure the euro area (and some other advanced economies) reflate powerfully enough to escape the liquidity trap, rather than settle in a lasting rut of low-flation and low growth, with "emergency" levels of asset purchases and interest rates becoming the norm.

If, as seems possible, the ECB will increase, in H1 2016, the scale of its monthly asset purchases from €60bn to, say, €75bn, and if these additional purchases are concentrated on public debt, the euro area will benefit from a 'backdoor' helicopter money drop –something long overdue.

Myth of the Deflation Monster

Buiter wants to slay an imaginary monster, deflation.

He moans "Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990."

Other than the absolute mess Japan has gotten into as a direct result of decades of deflation fighting madness, what problem has a lack of sustained positive rate of inflation caused Japan?

The answer is: None.

The bank of Japan is now the entire market for Japanese debt. What positive result stems from that?

The answer once again is: None.

Nonetheless Buiter wants the ECB to pursue the same inane path.

There will be no benefit. Leverage will rise, not sink. And to top it off, debt purchases of the nature he wants are likely illegal under the Maastricht treaty.

Buiter has learned nothing from history. He ought to look in a mirror, admit he sees failure, and resign.

But economic illiterates don't resign, they just keep promoting policies that both common sense and history show can never work.

Challenge to Keynesians

The simple fact of the mater is "Inflation Benefits the Wealthy" (At the Expense of Everyone Else) .

If Buiter disagrees, he can respond to my Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit"

Mike "Mish" Shedlock

Evolution of Shipping: Amazon Starts Own Air Cargo and Trucking Services

Posted: 26 Dec 2015 03:03 PM PST

Evolution of Shipping

After announcing Amazon Prime, free Two-Day Shipping for eligible purchases, Amazon followed up Air Prime, a future delivery system from Amazon designed to safely get packages to customers in 30 minutes or less using drones.

The next logical step is for Amazon to cut out as many air delivery middlemen as it possibly can.

Thus, it cannot be much of a surprise to learn Amazon Starting its Own Air Cargo Operation.

Cargo Facts reported today [December 18] that Amazon is building its own cargo operation and is in talks with Boeing to acquire up to 20 767-freighter jets to help deliver packages to customers around the U.S.

The Seattle Times also reported about Amazon's plans on Thursday, but noted that the company is looking to lease jets, not purchase them, because it does not have an Air Operator's Certificate, among other reasons.

When asked for comment, Amazon.com provided this statement to GeekWire: "We have a longstanding practice of not commenting on rumors and speculation."

An article last month ["A Mysterious Air Cargo Operation, Amazon.com?"] noted that a mysterious company, presumably Amazon, was flying four cargo flights per day out of Ohio's Wilmington Air Park, which previously served as a facility for DHL until 2008.

The mystery company used four contracted Boeing 767s that fly to and from four U.S. airports - Allentown, Ontario (CA), Tampa, Oakland - that all have nearby Amazon distribution centers.

Having more control of the entire end-to-end customer experience would also help Amazon avoid issues it has had with third-party delivery companies like UPS during its busy holiday season.

Amazon Branded Trucks

On December 4, Amazon announced Branded Truck Trailers for Inventory Management.

for Amazon, the initiative is the latest sign of the e-commerce giant's increasing interest in taking transportation of its merchandise into its own hands.

The company still relies on traditional mail to deliver most packages, but Amazon has been experimenting with its own methods, including bicycle couriers, Amazon Fresh delivery trucks, drones and an Uber-like crowdsourced delivery system.

The release notes the company has begun rolling out thousands of trailers to "increase capacity for package delivery from fulfillment centers to sort centers."

In other words, the trailers won't be delivering packages to customers' doors.

Amazon Planes