A Real Look at Helicopter Money

His detractors condescendingly called former Fed Chairman Ben Bernanke “Helicopter Ben”. This comes from an off-the-cuff comment Bernanke once made in a speech about deflation.

In a nutshell, Bernanke argued that prolonged price deflation was impossible because the government “has a technology, called a printing press that allows it to produce as many U.S. dollars as it wishes at no cost.”

He went on to say the government could go so far as to print money and then dump it out of helicopters if push came to shove, hence his nickname.

It’s been a while since I’ve seen the term “helicopter money” used in the financial press. But the expression is back with a vengeance after Mr. Bernanke’s recent visit to Japan.

You see, Japan is in a real mess. The country has been facing on-again / off-again deflation for going on three decades now. To put it in perspective, the last time Japan had sustained inflation Bill Clinton was still the governor of Arkansas.

That’s a long time to be fighting deflation.

And Japan really has been fighting. The Japanese equivalent of the Fed funds rate has been at zero or very close to zero since the mid-1990s. Japan invented quantitative easing, as we know it today, and has been a trailblazer in monetary shenanigans for as long as anyone can remember.

And yet none of it seems to be working. Japan remains stuck in a deflationary funk.

In the August issue of Boom & Bust, I get into some of the nitty gritty details on what is causing Japan’s deflationary malaise. But today I want to focus on what it was that Helicopter Ben suggested to his Japanese counterparts.

Bernanke reportedly suggested that the Japanese government issue perpetual zero-coupon bonds that would be immediately snapped up by the Bank of Japan.

Stop and think about that for a minute. Perpetual… and zero coupon. That means it’s a bond that pays no interest and never has to be paid back.

We have a word in English for that. It’s called a gift.

What Bernanke is suggesting is about as close to real-life helicopter money as you can get. The Bank of Japan would be creating money out of nothing and essentially giving it to the Japanese government to finance its expenses.

As investors, how can we play this? While it is likely to end badly, might there be some great money-making opportunities along the way?

The easiest way to directly profit is to short the Japanese yen, and I discuss how to do that in the August issue. But plenty of secondary opportunities exist as well.

Remember, money knows no borders in this day and age. Monetary stimulus created in one country sloshes around the world. So, a lot of helicopter money created in Japan will inevitably find its way into the American bond market. This means that our bond yields – which are already ridiculously low – could still go a lot lower.

Low bond yields mean high bond prices, of course. But they also mean higher prices for bond substitutes such as dividend paying stocks, REITs and closed-end funds (CEFs).

The closed-end fund angle is interesting to me.

So interesting, in fact, that I launched an entirely new newsletter to seek out opportunities in the closed-end space, Peak Income.

I expect to see closed-end funds as an asset class to make money for investors in three ways.

• First, they tend to throw off a lot of income in the form of dividends. With bond yields low and probably getting lower, the high yields offered by closed-end funds is the sort of thing that makes you sit up and pay attention.

• Secondly, because the assets that CEFs tend to buy are themselves high-yielding securities, the global hunt for yield should mean a bump in the prices of the underlying portfolio holdings.

• And finally, I expect CEFs as a group to trade a lot closer to their NAVs. CEFs often trade at discounts or premiums to their NAVs. As an asset class, the discounts got a lot wider than usual in late 2015 and early 2016. The discounts have already started to shrink, but I expect that trend to continue as money continues to flood into this space.

If you’d like to know more about closed-end funds, Peak Income may be the service for you. I’ll look for a new opportunity in the close-end fund space each week.